Raising Finance

Raising finance is considered as essential activity with any business if they want performs effectively. In my opinion, the most difficult step is the company must decide which kind of financing method best suit with their business. Base on the nature and size of the business, the managers have to determine the total amount of financial needs. As a result, the right choice puts business on a firm financial footing, avoiding risks and increasing financial returns. There are two methods to raising funds in business: equity financing and debt financing. Each method is implemented in many different ways and has advantages as well as disadvantages for business.  

Firstly, equity financing is a method which gains money from investors through exchange for an ownership share in the business. The most common way to raising capital through equity financing is issuing ordinary shares. The primary advantage of equity financing is that the business is not obligated to pay back the capital.  However, the shareholders and investors expect to receive positive result about financial situation of company to guarantee that their investment develops effectively. But, one of the main disadvantages of this method is that the investors will hold a part of share and become partial owners of the business. Therefore, the owners of this company can lose some control and decisions rights in each activity. From that, the managers have to face with problem that they would lose autonomy in operating the company. Besides, if the business applies equity financing method, they must spend much money in different cost to issue shares and satisfy shareholders.

In terms of debt financing, the company can raise capital through many ways such as borrow banks or government agencies, bonds, etc. Financing business activities through debt financing allows business owners to take control of the entire business operation. Moreover, the interest rate that the company must pay would be considered as valid expenses and tax-deductible. This deduction is part of the profits of company and helps them to reduce the amount of taxation. However, if the business does not pay the loan on time, the credit rating of the business will be affected. It makes business difficult when loans in the future, or may not be allowed to borrow. In addition, with new businesses, commercial banks may require business owners must mortgage personal property. This means that if the company is not operating effectively, the owners will lose all personal property which used mortgage. The business mobilizing business loans as much as the higher risk of bankruptcy.

For example, on 14 February 2013, American Airlines and US Airways have confirmed plans to merge, in order to form the world's biggest airline. The merger will bring an estimated market valuation of $11bn. The shares of the new company will be owned by American Airline creditors, who will have 72% of the company and the new business will use the American Airlines brand. However, the chief executive will be the current US Airways boss, Doug Parker. This merger could be considered as one of the ways of equity financing. When merging, the company will attract more investment opportunity from wider ranges of investors. Therefore, the supply of equity capital is more abundant while the company no need to waste any direct costs to issue shares. It helps to improve value of long-term shareholders and company performance in the near future.