How Capital is Acquired by a business house?

A corporation needs capital in order to start up, operate and expand its business.  The process of acquiring the capital is known as financing.  A corporation uses two basic types of financing

A    a)      Equity Financing

       b)      Debt Financing

Equity Financing refers to funds that are invested by owners of the corporation. Debt financing, on the other hand, refers to funds that are borrowed from sources outside the corporation.

Equity financing can be exemplifies by the sale of corporate stock.  In this type of transaction, the corporation sells units of ownership known as shares of stock.  Each share entitles the purchaser to a certain amount of ownership.  For example, if someone buys 100 Shares of stock of XYZ company, that person has purchases 100 shares of the company’s resources, materials, plants etc.  The person who purchases and holds the stock is known as Stockholder or shareholder.

All corporations, regardless of their size, receive their starting capital from issuing and selling shares or stocks.  The initial sales involve some risk on the part of the buyers because the corporation has no record of performance.  If the corporation is successful, the stockholder may profit through increases valuation of the shares of the stock, as well as by receiving dividends.  Dividends are proportional amounts of profit usually paid quarterly to stockholders.  However, if the corporation is not successful, the stockholder may take a severe loss on the initial investment.

The company should go for Debt Financing when it couldn’t meet its expectations through equity financing. Example of Debt financing is, Sale of Corporate bonds. In this type of agreement, the corporation borrows money from an investor in return for a bond.  The bond has a maturity date, a deadline when the corporation must repay all of the money it has borrowed.  The corporation must also make periodic interest payments to the bondholder during the time the money is borrowed.  If these obligations are not met, the corporation can be forced to sell its assets in order to make payments to the bondholders.

All businesses need financial support.  Equity financing and Debt financing provide important means by which a corporation may obtain its capital.