finance_1121

Companies have to raise finance in order to meet their activities and to expand and a certain point. They have four main sources of finance:

Firstly, shares are part of a company’s equity. A company will issue more shares into the stock market in order to increase the number of shares and the overall equity. By doing so, they obtain money for the new shares and the new shareholders are entitled to their correspondent rights.

In addition, companies will also obtain loans. They will borrow a quantity of money that they will return with a rate of interest on it. The rate of interest is usually a floating rate, which goes up or down according to a market interest rate indicator; the central bank fixes a minimum lending rate which will more or less determine all the other interest rates. Loans can be obtained through financial institutions or directly through the public markets. Moreover, small and medium-sized companies obtain long term loans from commercial banks or merchant banks, whereas large companies can arrange syndicated loans from a group of banks or other lending institution.

Thirdly, another source of finance is leasing. By leasing an asset, a company will rent it from a leasing institution. Furthermore, some companies are able to lease it buy the asset in the future subtracting the total rent paid throughout the years from the price it is sold at.

Finally, companies usually raise large blocks of finance by issuing debt to the capital market: bonds. Bonds are generally issued at a fixed interest rate, lower than banks’ interest rates. They are divided into parts and bought separately by individuals, so they can be financed by many different sources. In Europe, medium sized companies are often quite active in raising finance on the bond market.

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