When the Banker Says No
Despite the positive trend in the stock market and many businesses claiming recovery from the recent global financial crisis, banks remain firm on their policies – no loan until the bad ones have been cleared off. This means that companies, big and small, are now forced to find new sources of funds if they want to continue doing business.
A corporation may opt to raise capital through one of the following: initial public offerings or IPOs, issuance of bonds, borrowings from financial institutions other than banks, or mergers with stronger and more liquid companies.
A company can raise substantial funds through an IPO. These resources are frequently utilized for huge capital and operating expenses, i.e. expansion into a new market, development of new products or product lines, and putting up new facilities and plants. Companies, though, should be very cautious as other companies interested in acquiring a majority percentage of its stocks for control can play the market through various individuals – accumulating the needed stocks and seats in the board of directors without the company realizing it. This, of course, may lead to major changes in terms of who makes the final decisions.
Another source of financing for major corporations is the issuance of bonds. In 2009, more and more companies have resorted to this type of financing in a desperate attempt to save their businesses amidst the global financial crisis. In some Asian countries, newly listed firms have issued bonds a year after being listed. This alone provides proof of the industry’s need for more capital and the impact the crisis has on the industry’s financial stability.
A bond is a promise of a corporation to make principal and interest payments to the bondholder or creditor based on a specified timetable. One would ask why firms would choose to issue bonds and therefore incur a liability and pay interests rather than raise funds through ownership capital. The answer is because the cost of raising funds such as issue costs of a bond, payments to underwriters, and arrangement fees with a bank are lower, and second is because it is easier to attract creditors rather than investors. Bonds offer a fixed and assured rate of return over a specified period. Another key factor for firms is the fact that interests are tax deductible while dividends are not.
One other option a company has is allowing a merger or acquisition. Generally, this is the last thing that comes to mind, but when situation dictates the need for immediate capital and non-merger or non-agreement to an acquisition will result to bankruptcy, a company will most probably grab its last resort. The disadvantage? Loss of control. They get their hands on new capital, but they lose their tongues.
Various types and sources of financing are available to small to medium-sized businesses and huge multinational companies. What is more crucial is determining which one best suits one’s needs. It is very important to determine how much capital a company needs to raise and how much it is willing to lose in return.
A corporation may opt to raise capital through one of the following: initial public offerings or IPOs, issuance of bonds, borrowings from financial institutions other than banks, or mergers with stronger and more liquid companies.
A company can raise substantial funds through an IPO. These resources are frequently utilized for huge capital and operating expenses, i.e. expansion into a new market, development of new products or product lines, and putting up new facilities and plants. Companies, though, should be very cautious as other companies interested in acquiring a majority percentage of its stocks for control can play the market through various individuals – accumulating the needed stocks and seats in the board of directors without the company realizing it. This, of course, may lead to major changes in terms of who makes the final decisions.
Another source of financing for major corporations is the issuance of bonds. In 2009, more and more companies have resorted to this type of financing in a desperate attempt to save their businesses amidst the global financial crisis. In some Asian countries, newly listed firms have issued bonds a year after being listed. This alone provides proof of the industry’s need for more capital and the impact the crisis has on the industry’s financial stability.
A bond is a promise of a corporation to make principal and interest payments to the bondholder or creditor based on a specified timetable. One would ask why firms would choose to issue bonds and therefore incur a liability and pay interests rather than raise funds through ownership capital. The answer is because the cost of raising funds such as issue costs of a bond, payments to underwriters, and arrangement fees with a bank are lower, and second is because it is easier to attract creditors rather than investors. Bonds offer a fixed and assured rate of return over a specified period. Another key factor for firms is the fact that interests are tax deductible while dividends are not.
One other option a company has is allowing a merger or acquisition. Generally, this is the last thing that comes to mind, but when situation dictates the need for immediate capital and non-merger or non-agreement to an acquisition will result to bankruptcy, a company will most probably grab its last resort. The disadvantage? Loss of control. They get their hands on new capital, but they lose their tongues.
Various types and sources of financing are available to small to medium-sized businesses and huge multinational companies. What is more crucial is determining which one best suits one’s needs. It is very important to determine how much capital a company needs to raise and how much it is willing to lose in return.
