Equity financing – There is a well-known saying in the world of companies and business: “Putting all your eggs in one basket is not considered a successful or appropriate business strategy.” This saying is true with regard to financing your new company, as the diversity of financing sources enables the company to increase its opportunity to obtain the appropriate financing to meet the specific needs of the company as well as to enable the company to better overcome potential problems.
Sources of financing the company’s operations
Most companies are always looking for sources of financing in order to develop the company and its business, and financing can be for short-term or long-term goals, so the financing sources include the following:
1- Equity financing
Equity financing refers to the process of raising capital through the sale of shares, where companies raise money because they may have a long-term goal that requires funds to invest to achieve these goals through the sale of shares, or they may have short-term goals, such as the need to pay bills, and the company may have to sell ownership for cash.
Equity financing methods
To obtain equity financing, companies may use several methods, including:
- Venture capital: Venture capital is used by companies whose businesses are fast-growing and oriented toward selling on the stock market. This type of financing is also known as “private equity financing.”
- Stock market: The stock market helps companies increase their capital and shares with the aim of growth and increasing financing for the company’s development.
- Institutional Investment Scheme: Small businesses that engage in qualifying trading use the Institutional Investment Scheme to raise their funds. There are several tax benefits for individual investors in these companies, including a 30% income tax exemption.
- Crowdfunding: Crowdfunding refers to the investment, lending, or contribution of a number of people with small amounts to a particular company or idea, where these funds are collected to help reach the financing goal.
2- Debt financing
This type of financing occurs when the company resorts to raising funds by selling debt instruments, which are in the form of bank loans or financial bonds. This type of financing is also known as leverage. There are two main types of debt financing, namely:
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Short-term financing
Companies use this type of financing to finance the daily operations of the company, such as paying wages, purchasing inventory, or financing expenses incurred by the company on maintenance and supplies, and loans are repaid within one year only.
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Medium and long-term financing
Companies use this type of financing to purchase assets such as equipment, machinery, and buildings, as the company usually uses these assets as collateral for loans. In long-term loans, the loan is repaid within 10 years with fixed interest rates and specific monthly payments.
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Debt financing methods
There are several options for debt financing, including:
-Bank loans
-Bond issuance
-Credit cards and family loans
3- Financing retained earnings
The main goal of most companies is to maximize profits, as the company can maximize its profits by selling goods or providing services at a price higher than the cost incurred by the company in producing these goods. As this is considered the most primitive method of financing companies, the company also decides the best way to use its capital. Some companies distribute retained earnings to their shareholders, or some companies may reduce the number of shares by repurchasing them; instead, some companies may invest retained earnings in new projects that could be a source of financing the growth of the enterprise.
Company financing expenses
Financing costs, or what is known as the cost of financial resources, are expenses incurred by companies as a result of borrowing money in order to build or buy assets, finance a mortgage on a house, finance a car loan through a bank, or finance a student loan, and examples of them are: interest expense, the total expense associated with securing funds for a particular project, financing fees charged by an intermediary financial institution, salaries of any employees required to complete the financing process, interest on loans, overdraft fees, or any other fees that may be involved in borrowing funds.
Types of financing expenses
Finance expenses may include the following costs:
- Amortization of discounts and installments based on the company’s loans.
- Amortization of other costs incurred related to loans.
- Foreign exchange differences and fees apply when borrowing occurs in a foreign currency.
- Finance charges related to financial leases.
Read also: Balance sheet vs statement of financial position
