HOW TO RAISE EQUITY CAPITAL

Huge corporations would not have been able to grow to their present size without being able to find innovative ways to raise capital to finance expansion. Corporations have some methods for obtaining that money. There are several types of funding options that can be exposed by the corporations.

1. Debt Financing

Debt financing involves borrowing money from banks or organizations and raising equity capital in which you sell a portion of the business ownership to others. Debt financing has become an attractive option for most people due to acquiring loan for a business allows you to retain full ownership; you are not responsible to investors or shareholders who have a stake in your business. You have the ‘reigns’ in your hands and apart from paying back the loan, interest and fee there is not a lot that needs to come out of your pocket. It’s undoubtedly a more affordable alternative to raising capital. However there is a drawback to it as well, in some circumstances lenders may have significant influence. For example, lenders may urge that the company does not exceed certain liquidity or solvency ratio levels, or they may take a charge over a particular building as security for loan, moreover it will be restricting the director’s freedom of action over the use and disposal of that building.

There is also contradiction between debt finance and equity finance in term of requiring regular cash outlays in the form of interest and the repayment of capital sum. The firm have to maintain the repayment schedule every year eventhough they are experienced a bad year or there is possibility of action being taken by the lender to recover their money by forcing the firm to sell assets or liquidate.

2. Selling Common Stock

Company will able to raise capital by issuing common stock if they were on good financial health. Usually, investment banks help companies issue stock, agreeing to buy any new shares issued at a set price if the public refuses to buy the stock at a certain minimum price. Although common shareholders have the exclusive right to elect a corporation's board of directors, they rank behind holders of bonds and preferred stock when it comes to sharing profits.

Investors are attracted to stocks in two ways. Some companies pay large dividends, offering investors a steady income. But others pay little or no dividends, hoping instead to attract shareholders by improving corporate profitability and hence, the value of the shares themselves. In general, the value of shares increases as investors come to expect corporate earnings to rise. Companies whose stock prices rise substantially often "split" the shares, paying each holder, say, an additional share for each share held. This does not raise any capital for the corporation, but it makes it easier for stockholders to sell shares on the open market. In a two-for-one split, for instance, the stock's price is initially cut in half, attracting investors.

However there are some drawbacks of this type of funding, first of all it is quite often that the cost of selling common stock is higher than the cost of raising the same amount of money by obtaining additional loans. For instance there is the direct cost issue such as the costs of advice from investment bank or broker. And the other downside is dividends cannot be used to reduce taxable profit because the dividends are paid out after-tax earnings, whereas interest payments on loans are tax deductible.  When a company pays interest the tax authorities regard this as a cost of doing business and therefore it can be used to reduce the profit subject to tax.

3. Using Profits

Companies also can finance their operations by retaining their earnings. Strategies concerning retained earnings vary. Some corporations, especially electric, gas, and other utilities, pay out most of their profits as dividends to their stockholders. Others distribute, say, 50 percent of earnings to shareholders in dividends, keeping the rest to pay for operations and expansion. Still other corporations, often the smaller ones, prefer to reinvest most or all of their net income in research and expansion, hoping to reward investors by rapidly increasing the value of their shares.