Options for Raising Business Capital

Options for Raising Business Capital

University of the People

Abstract

The paper is focused on the study case of The Great Service Cleaning and Maintenance Company which requires to raise capital of $200,000. The company is a closely held corporation with less than 50 shareholders. When a company needs money, it can take three routes to obtain financing, equity, debt, or some hybrid of the two. Equity represents an ownership stake in the company. It gives the shareholder a claim on future earnings, but it does not need to be paid back. If the company goes bankrupt, equity holders are the last in line to receive money. The other route a company can take to raise capital for its business is by issuing debt a process known as Debt financing occurs when a firm sells fixed income products, such as bonds, bills, or notes, to investors to obtain the capital needed to grow and expand its operations. When a company issues a bond the investors that purchase the bond are lenders who are either retail or institutional investors that provide the company with debt financing. The amount of the investment loan, referred to as the principal must be paid back at some agreed date in the future. If the company goes bankrupt, lenders have a higher claim on any liquidated assets than shareholders.  A company's investment decisions relating to new projects and operations should always generate returns greater than the cost of capital. If returns on its capital expenditures are below its cost of capital, then the firm is not generating positive earnings for its investors. In this case, the company may need to re-evaluate and re-balance its capital structure.

Provide a narrative about private debt, private transfer of partial ownership, private transfer of entire ownership, public debt issuance, and public equity offering.

Private Debt Financing

Raising capital through debt is often compared to raising capital through equity. The major difference is that equity requires you to give up partial ownership of your company. Debt capital however allows you to keep all ownership in return for interest and principal payments. The major negative with debt capital is that your funding will come from banks which require company to pay monthly interest on their loan which can be very difficult for businesses without established revenue streams. Most banks will ask for your old financial statements, more specifically for documents from the last three years. These documents allow the bank to evaluate how risky your business is and if you'll be able to make the monthly payments. Depending on your business' current position, this will either help ensure you a loan if you have healthy revenue streams, or make funding through debt more difficult. Looking at the financial statement of the company from 2014 and 2013, the company should be good to make repayments as the company income is healthy. According to data retrieved from World Bank website the average corporate loan in the US is 3.5%, which shows that if the company raise all capital by private loan by repaying in 5 years terms it would have to pay $ 43, 660 annually to the Bank (Lending interest rate, 2018). Disadvantage company face by taking loan from the bank is that it can't issue any more debt until the bank loan is completely paid off and it can't participate in any share offerings until the bank loan is paid off.

Loans are represented as liabilities on the balance sheet. Repayments reduce the amount of loan payables recognized in financial statements. The principal payment will also be reported as a cash outflow on the Statement of Cash Flows (Hecht, 2016).

Private Investor with Share Ownership

When utilizing equity, investors become owners of the business with the previous shareholders, the amount of ownership held by each is dependent upon a negotiation, which in turn is based upon the funds invested and the agreed-upon value of the business. Companies typically want as much money as possible for as little equity as acceptable whereas investors are the opposite, wanting as much equity as possible for as little money as possible. The final equity proportions and amount of money raised is generally a compromise based upon the eagerness of the investor to invest and the desperation of the company looking for money. Private equity financing has some distinct advantages over other forms of funding. As private equity firms will help re-evaluate every aspect of company business to see how company can maximize its value. This can lead to problems, of course, if their idea of maximizing value doesn’t match of previous shareholders. But having experienced professionals intimately involved in your business can also result in major improvements.

A long-term investment will be mentioned as an asset on balance sheet that represents the company's investments, including stocks, bonds, real estate and cash, that it intends to hold for more than a year (Lewis, 2013).

Partial or Complete Private Buy-Out

A buyout is the purchase of a company's shares in which the acquiring party gains controlling interest of the targeted firm. These buyouts could be total or partial and what happens for the business owners after a buyout depends on the terms of the buyout agreement. In a partial buyout one or more partners in the private equity firm takes a role as a director on the target’s board of directors. They typically request monthly financial and general operational reports to make sure the company is performing positively. Company owners can face problem by this type of investment as if company’s performance is not good the private firm will take aggressive actions to protect its investment. A buyout process typically takes time as the purchaser examines the target company’s balance sheet, income statement and statement of cash flows, and conducts a financial analysis on any subsidiaries or divisions seen as valuable. The buyout requires substantial financing, which will have an impact on company cash flow. To compensate for the repayment the buyer will need a strategy to increase cash flow through cost cutting, improved productivity or building revenue.

Complete buyouts can create new growth opportunities for existing companies that have exhausted all their opportunities for margin expansion. And they can create opportunities to create the type of equity value that can make investors millionaires. But company buyouts are also complex and require considerable investment and attention to detail every step of the way (Severs, n.d).

Issue Public Debt (Corporate Bonds)

The bonds are the money which an investor lend to a company that pay them the interest in exchange. The Great Service Cleaning and Maintenance Company can use this money for their new projects, refinance old debts or any things which is decided by the board of directors.  By issuing corporate bonds the Great Service Cleaning and Maintenance Company can manage to collect around $200 million for their business. Bonds can be a very flexible way of raising debt capital. They can also offer a way of stabilizing company's finances by having substantial debts on a fixed-rate interest. Corporate bonds also provide benefit that they do not dilute the value of existing shareholdings, unlike issuing additional shares. Corporate bonds enable more cash to be retained in the business because the redemption date for bonds can be several years after the issue date.