Corporations need funds from external sources, or capital, when they are looking to grow and expand their business into newer areas or markets, when they are investing in research and development, or need to keep one step ahead of the competition.
Companies can use the money from the profits that their business operations have created, but it is often advantageous to fund projects with finance obtained from investors or external lenders, such as Maxiron Capital.
The top 3 ways businesses can fund new projects are:
1. Retained Earnings
The objective of most companies is to profit from selling services or products at prices that are more than the cost to produce them. The source of funds created by these profits is called retained earnings and is the most basic fund source, and hopefully, a method that brings in greater sums of money.
While these funds are often used to reward shareholders through share buybacks or dividends, they can also be used to fund business growth or to invest in other projects.
2. Debt Capital
Companies, like individuals, can borrow money. These corporate bonds are debt issues that allow a vast number of investors to become creditors or lenders to a company.
The drawback to this form of raising funds is that the lender has to be paid interest, and when the company fails to pay the interest or cannot do repayments to the principal, it can lead to defaults that can lead to bankruptcy. Interest paid on this debt capital is tax-deductible, and this lowers the cost of raising the needed capital.
3. Equity Capital
Money can be generated by companies by selling parts of itself to investors in the form of shares, a process that is called equity funding. The benefit comes from the fact that these investors do not need to be paid any interest like you would have to pay investors in corporate bonds.
Further profits will, however, have to be divided among more shareholders and this can be a drawback. Shareholders also have voting rights and this leads to the dilution and forfeiture of ownership control as more shares get sold.
Available Sources of Funding for Companies
In an ideal situation, companies can bring in all the money they need by selling their products or services at a profit. But, it is said that you have to spend money to make money, and every company does reach a stage where it has to raise additional funds to expand into new markets or even with just upgrading your equipment.
Looking at the balance of the most likely sources of funding helps to evaluate companies. An increase in debt can lead to trouble. At the same time, if it does not use money that it can safely borrow it can miss growth prospects.