Finance1807

There are several ways in which companies can finance themselves. The most relevant ones are:
First of all one of the most basic and common ways companies have to finance themselves is through a loan. This is lent by commercial banks and allows the borrower (once he has fulfilled the bank’s requirements) the chance of having the money right away which means a big advantage although it also presents an important disadvantage to take into account and it’s the fact that the borrower(in this case the company) will be not only repaying the principal back but he will also have to pay a significant amount of interest rates.

Another way in which self-financing companies increase their funds is by becoming a public company, in other words, making a flotation, which will involve issuing shares. This may cause several disadvantages because it entitles the shareholders to take part in important decisions (via voting in the Annual General Meeting) and if owning a big amount of these the shareholder may be able to be a part of the board of directors. Another disadvantage of floating a company is that it demands for it to have always, when possible, a high turnover, good results, transparency and in conclusion a prosperous business. In the other hand it also presents some advantages such as the fact that the company will not be paying interest rates (such as in loans) but only dividends, decided by the board of directors, and the amount can vary based on the company’s profits. It’s also important the fact that the original owners of the company can get back the total control of the company by buying back the shares.

It is also important to take into account, as a way in which companies finance themselves, the issue of bonds which also increases the company’s liquidity and, compared to shares, the company that issues it does not lose any of the management control. This self-financing way has an important tax shield as the interest payments from its profits are deducted before paying taxes whereas dividends are paid out of already-taxed profit. The disadvantage of issuing bonds is that as well as repaying the money back to the bondholders the company must also pay a quantitative interest rate for borrowing the investors money.

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