- Feb 17, 2018
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Hey guys, I'm still finishing up the first of the Law Insights page (I'm hoping to finish it tomorrow). In the meantime, I'll post a few short articles I did on popular commercial-awareness interview questions. This one is about how a company can raise money. I go into more detail in the M&A guide, but I appreciate this might be a little more practical.
Equity
The owners of a company are called shareholders. They invest money in a company in return for shares – like pieces of ownership. A company can have one share owned by one shareholder. Larger companies can have millions of shares across thousands of shareholders.
A company must run big decisions by its shareholders in a vote. For most companies, one share gives you one vote. So the more shares you have, the more influence you have over a company.
Equity finance means selling more shares in a company for capital. If you’ve watched Dragons Den, that’s exactly what people are doing on there: they ask for say £100,000, in return for a 20% stake in their business. Public companies do this on a much larger scale, in what’s known as an Initial Public Offering or IPO.
Debt
I'll concentrate on the two big ways of raising finance through debt: a loan or a bond.
Loans
This is pretty simple, a company borrows a fixed sum, usually from a bank. It pays the bank back in instalments, with interest, over an agreed length of time.
Bonds
Think of these as a loan split up into many chunks but instead of a bank, there's a group of investors.
A company issues bonds to investors in return for money. Investors get the right to receive interest payments at regular intervals during the life of the bond. At a certain date, the bond ‘matures’ and the company pays the original sum back to investors.
Equity v debt
Generally speaking, if it’s a company with a healthy cash-flow and profits, debt is cheaper than equity; selling a stake in a business is a significant long-term cost. If a company is small and at risk of defaulting on payments, equity finance is much safer. You can also check out the comparison attached.
How a company raises finance
If a company wants to raise money, there are two broad options: equity or debt.
Equity
The owners of a company are called shareholders. They invest money in a company in return for shares – like pieces of ownership. A company can have one share owned by one shareholder. Larger companies can have millions of shares across thousands of shareholders.
A company must run big decisions by its shareholders in a vote. For most companies, one share gives you one vote. So the more shares you have, the more influence you have over a company.
Equity finance means selling more shares in a company for capital. If you’ve watched Dragons Den, that’s exactly what people are doing on there: they ask for say £100,000, in return for a 20% stake in their business. Public companies do this on a much larger scale, in what’s known as an Initial Public Offering or IPO.
Debt
I'll concentrate on the two big ways of raising finance through debt: a loan or a bond.
Loans
This is pretty simple, a company borrows a fixed sum, usually from a bank. It pays the bank back in instalments, with interest, over an agreed length of time.
Bonds
Think of these as a loan split up into many chunks but instead of a bank, there's a group of investors.
A company issues bonds to investors in return for money. Investors get the right to receive interest payments at regular intervals during the life of the bond. At a certain date, the bond ‘matures’ and the company pays the original sum back to investors.
Equity v debt
Generally speaking, if it’s a company with a healthy cash-flow and profits, debt is cheaper than equity; selling a stake in a business is a significant long-term cost. If a company is small and at risk of defaulting on payments, equity finance is much safer. You can also check out the comparison attached.
