Equity and Debt Funding/Financing in companies
Companies, generally, whether start ups or blue chips, may at some point in time, during or before the existence of the business, need to seek some form of funding.
Businesses that are struggling with cashflow may find external funding really beneficial, especially in the form of equity, as this would help in ensuring the company stays afloat even when they are not making any profits.
Companies seek funding for purposes such as:
- Financing new projects.
- Purchasing new assets.
- Scaling up the business to the next level.
- Starting up the company (for new business entrants).
- Financial burden, in tough economic times, such as bankruptcy.
The funding may be in the form of debt or equity, and in some cases a company could seek opportunities in both.
Debt could be, in most cases, financially referred to as leverage (Financial leverage), and it is when companies borrow funds.
Equity financing could also be referred to as share financing, and it is when companies offer a portion of its business ownership for funding.
As much as both options may seem appealing in their opportunistic sense, companies need to assess their own positioning in values, sector, industry and among other factors before seeking either of the external funding options.
Companies could gain funding from multiple sources such as:
- Financial institutions including banks and investment firms.
- Venture funds.
- Acquisitions and mergers.
- Friends and family who are interested and willing to contribute to the growth of the company.
- Founder/s and employees.
Strategically positioned companies will mostly include debt items in their balance sheets, specifically for kick starting or advancing operations in the fields of research and development.
External financing/funding creates an effective environment for a business to grow quickly and meet its targets.
Nonetheless, companies should analyze their feasibility in the long run so as to prevent the downsides associated with outside funding.