To meet long-term, medium-term, and short-term financial requirements, companies can use various sources to raise funds for their business. This article provides an overview of the main methods used in today's business landscape. A joint-stock company is free to choose its own capital structure. This may happen through:Sources of Business Finance
Methods For Raising Long-Term Funds
Methods For Raising Medium-Term (or Intermediate-Term) Funds
Methods of Raising Short-Term Funds
Sources of Raising Borrowed Funds
Sources For Raising Long-Term Borrowed Funds
The Pattern of Capital Structure
Various Sources of Raising Funds for a Business FAQs
An advantage is that it involves passing on some risk to the shareholders. Additionally, new equity issues are generally regarded favorably by existing and potential investors, also providing access to additional sources of capital for diversification purposes.
The main disadvantage is that interest costs and debt servicing requirements may reduce the net income available for dividends or reserves, possibly adversely affecting earnings per share. It may also limit the companies’ growth potential.
It offers additional liquidity than other forms of funding because there is no voting rights, or claim to the company's assets. Moreover, by borrowing through the creation of a separate legal entity, it also allows companies to diversify their sources of finance and limit their exposure to market fluctuations.
Debt levels are typically much higher than for shareholder-funded companies. This means that portions of income must be reinvested in the business to pay interest on loans, rather than funding growth or paying dividends. However, as debt constitutes a fixed liability, it also makes the company susceptible to bankruptcy risk in the event of a downturn in business.
Preference shareholders have priority in receiving dividends before ordinary shareholders, but after debt holders. Additionally, it is also not possible for preference shareholders to receive unpaid dividends from earlier financial years because ordinary shareholders will already have received their dividend.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
