Business finance or corporate finance is an economic activity that helps commercial entities and non-profits secure cash for short-term operating needs or long-term investment decisions. An investment banker typically partners with a firm's corporate finance employees to find adequate funding sources based on firm size, financial health and monetary needs.
Business finance serves a fundamental economic function by helping borrowers such as companies and governments receive funds from investors, banks, insurance companies or individual bank depositors to finance operating needs, pay salaries or order goods and services. Corporate finance activities also influence capital markets transactions because traders and other participants may buy, hold or sell products, such as stocks and bonds which a company issues on a securities exchange. For example, a trader may buy PBL’s bonds and resell them for a quick profit.
Types of funding for profit and nonprofit organizations
Business entities may select funding options from a wide variety of tools and sources. A company management typically chooses a funding source based on market conditions, fund costs (interest expense) and alternative options. An entity may issue stocks, bonds, convertible bonds or preferred shares to investors on a securities exchange. Alternatively, a firm may apply for a private loan, a line of credit or an overdraft agreement with a bank, an insurance company or a hedge fund. •
Organizations that do not have profit motives, such as a governmental agency or a charitable institution, also may use business finance tools to raise cash for operating needs or long-term expansion projects. Such organization may borrow from a bank to finance activities.
There are a number of ways of raising finance for a business. The type of finance chosen depends on the nature of the business. Large organizations are able to use a wider variety of finance sources than are smaller ones. Savings are an obvious way of putting money into a business. A small business can also borrow from families and friends. In contrast, companies raise finance by issuing shares. Large companies often have thousands of different shareholders.
Large companies like could not have grown to their present size without being able to find innovative ways to raise capital to finance expansion. Corporations have different methods for obtaining that money: 1.
Issuing preferred stock
Selling of common stock
Government grants or other institution like SADC/ EU
Leasing/ Hire purchase
A bond is a written promise to pay back a specific amount of money at a certain date or dates in the future. In the interim, bondholders receive interest payments at fixed rates on specified dates. Holders can sell bonds to someone else before they are due. Corporations benefit by issuing bonds because the interest rates they must pay investors are generally lower than rates for most other types of borrowing and because interest paid on bonds is considered to be a tax-deductible business expense. However, corporations must make interest payments even when they are not showing profits. If investors doubt a company's ability to meet its interest obligations, they either will refuse to buy its bonds or will demand a higher rate of interest to compensate them for their increased risk. For this reason, smaller corporations can seldom raise much capital by issuing bonds. Issuing Preferred Stock. A company may choose to issue new "preferred" stock to raise capital. Buyers of these shares have special status in the event the underlying company encounters financial trouble. If profits are limited, preferred-stock owners will be paid their dividends after bondholders receive their guaranteed interest payments but before any common stock dividends are paid. Selling Common Stock. If a...
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