Raising corporate finance

It is important for companies to raise finance, because they need to develop and expand. In addition, by raising money companies can change their capital structure. Different size company raise money by different ways. In term of small and medium companies, they raise money by business angels, venture capital, venture capital trusts, enterprise investment scheme, government source and loan from bank and family. in term of large companies, they also raise capital by equity and debts. This blog focuses on that large company raise capital.

In respect of equity finance, large companies achieve it by issuing shares. There are some advantages. Firstly, there is no obligation to pay dividends. Secondly, companies do not repay the capital. However, there are some disadvantages. Firstly, issuing shares needs high cost. Secondly, entrepreneurs may loss control. Thirdly, taxable profit cannot be decreased. In respect of debt finance, it includes different loans, which are from bank and syndicated loans, and debt securities. In addition, larger and more creditworthy companies can raise money by international source such as Euromarkets. Meanwhile, an industrial corporation can raise money by project finance which does not be secured against parent company’s assets. Compared with equity finance, debt finance is less expensive. And entrepreneurs can keep control of their companies. Meanwhile, companies can reduce taxable profit. However, companies have to pay interests. And the loan is secured against assets owned by the business. This leads companies may loss assets. Therefore managers should choose suitable method to raise money.

New Look, which is a fashion company, prepares to enter into China and India. In china, new look plan to invest five to ten stores which needs from 10 million pounds to 20 million pounds. Meanwhile, its CEO Kristiansen said they will enter China alone, rather than by a joint venture. This is because Kristiansen has 13 years’ work experiences in China. On the other hand, the company plans to enter India with a joint venture partner.  In order to expend its international business, the company prepare to raise funds by debt including 750 million pounds of payment in kind notes. And it also plans to raise funds by bond markets. (Financial Times, 2013) in the case, New Look utilize debt finance because it can raise large amount of funds to expand its international business and capture developing market effectively. In addition, it has a low cost of raise funds. Meanwhile the managers can control the company. On its plan of entering India, it prepares to seek a joint venture partner. This might make conflicts with its partners in future, however, by this New Look could obtain Indian market experience and funds.

In my opinion, a company should mix equity finance and debts finance. In term of debt finance, it can utilize to develop a good project as the new look case. Meanwhile, I think a company should make suitable level of debts. If there are higher debts in a company, it may break cash flow in order to pay interests and capital. It will lead company bankrupt. If there are lower debts in a company, it may limit the speed of development and loss opportunity. In respect of equity finance, I think it is a good chose in long term. Although it has a high cost of issuing shares, in long term it will keep providing funds for company, if the company has good performance. However, I think it is a challenge for managers that how to balance debt and equity.