LAW 401 SEU Funding Options for Entrepreneurs Discussion
ACTION ITEMS
Party A graduated from business school and has learned the details about running a successful business. He is ready to utilize his education and does not want to work for anyone. Party A had decided to sell the fifty thousand rulers that his Uncle gave him. He knows that he will have to purchase additional supplies.
You are his business advisor, and he wants to know how he can raise the money to finance his business and if he should take out a loan.
Discuss the two main ways that corporations are financed?
Answer:
The two main ways that corporations are financed are through equity financing and debt financing.
- Equity Financing: Equity financing involves raising funds by selling ownership shares in the company to investors. In exchange for their investment, investors receive ownership stakes in the company, represented by shares of stock. Equity financing does not require the company to repay the funds raised, but it does dilute ownership and may involve sharing control and profits with shareholders. Common sources of equity financing include selling shares to angel investors, venture capitalists, or through an initial public offering (IPO) on the stock market.
- Debt Financing: Debt financing involves borrowing funds from creditors or financial institutions with the promise to repay the borrowed amount, usually with interest, over a specified period. Unlike equity financing, debt financing does not dilute ownership or control of the company. However, the company is obligated to make regular interest payments and repay the principal amount according to the terms of the loan or bond agreement. Common sources of debt financing include bank loans, lines of credit, corporate bonds, and convertible debt instruments.
In Party A’s case, he can consider both equity and debt financing options to raise the money needed to finance his business. Taking out a loan would fall under debt financing, where he would borrow the required funds and repay them over time with interest. Alternatively, he could seek equity financing by selling ownership stakes in his business to investors in exchange for capital. Each financing option has its advantages and disadvantages, and the choice between them depends on Party A’s financial situation, risk tolerance, and long-term business goals.
