Corporate finance is a study of a company’s financing area. Corporate financing efficiently plans and designs a company’s capital structure. It deals with investors for capital acquisition, managing debt issues, etc.
These are only a few examples of how your company benefits from corporate financing. Learning about this concept will help you to use your company’s earnings in a better way.
So, keep reading ahead to know how corporate financing works. The guide also talks about its various types and other relevant information.
What Is Corporate Finance?
To know about Corporate Finance, you must first learn what a Corporate Investment is. Corporate Investment is the money spent to increase a firm’s total assets. It includes the company’s existing assets. The purpose here is to produce a greater output using the available funds.
Your firm can receive funding from both external and internal sources. You can use them to invest in many promising projects. Borrowed amounts or raised capital are examples of external fund sources. Internal sources include the earned profits by your company over the years. For example, depreciation provision, reserves, etc.
Deciding how to use these funding resources is a crucial step. It can either make or break your company’s financial health. A well-planned finance framework is a must to make wise corporate investment decisions.
This is where corporate finance comes into play. It is a subpart of a finance strategy. It oversees how your firm addresses available funding sources. Plus, it manages your company’s capital structure, investment decisions, and accounts.
Corporate financing aims to enhance shareholder value. It creates short and long-term financial planning and strategies for future implementation. Financing executives create these strategies after studying the financial history of your company. Capital investment comes under these strategies.
Proper financial planning boosts revenues and reduces the company’s expenses.
Scope of Corporate Finance
Scope refers to the responsibilities and goals of corporate financing. It focuses on improving your firm’s sustainable growth and capital reserves.
The following are the relevant scopes of corporate financing:
It sources funds from debt or equity financing or both combined. Companies take long-term loans from investment banks to cover expenses or investment needs.
The aim here is to come up with the best plan on how to fund capital investments. Corporate finance balances these two resources. Depending too much on debt as a source can lead to repayment default. It can affect your firm’s reputation. In contrast, more equity will dilute value and earnings for new investors. Due to this, they might not show interest in funding your firm.
Corporate finance decreases the Weighted Average Cost of Capital (WACC) to the lowest. This way, it optimises your business’s capital structure.
Dividends and Return on Capital:
Corporate financing uses a company’s excess earnings in two ways-
- It distributes excess earnings to shareholders as dividends or buybacks.
- It keeps the capital for the firm’s future operational and investment needs.
Using excess capital for business growth is the best financing source. It eliminates the need to take external loans. Thus, reducing the risk of repayment defaults. It also reduces the dilution of equity value by offering more shares to shareholders.
You must keep excess capital only when financing officials are confident of a higher ROI (Return on Investment). If not, then buying back shares or paying dividends to shareholders is the best choice.
Goals of Corporate Financing
- Keep your company’s expenditure in check.
- Find and involve with beneficial projects only.
- Run market analysis to keep your firm updated with the latest trends.
- Takes the company’s financing decisions after deep research using trustworthy sources.
- Perform advisory roles for takeovers, mergers, and acquisitions.
- Survey investment options to offer the most effective financing strategies.
- Supervise the company’s expansion and investment profile.
Different Types of Corporate Finance
There are two types of corporate financing: equity financing and debt financing.
- Equity Financing
It uses funds from the earnings of the company and equity issuance. Some examples of equity include preferred stock and common stock. Equity lets your company list itself on a stock exchange. But you can also list the company on an OTC (over-the-counter) exchange. The aim here is to sell the company’s shares to gain funding.
- Debt Financing
Your company gets funding through banks and bond issuance. The financing type involves regular interest payment costs. You can pay the principal amount at the end of the loan’s repayment term.
Corporate Financing Options
The loan has a short repayment term of a few months or a year. The following loan options are part of a short-term corporate financing loan:
- Trade Credit:
The loan follows a B2B structure. Here, an agreement takes place between the company and the financing entity. It says a company can buy offered products and pay the entity later at a pre-defined date
- Financial Lease:
The lender owns the company’s assets until you repay them. Yet, the company still has operating control over the assets.
- Accrual Account:
It refers to the use of accrual accounting methods for raising funds. An accrual account enables your company to pre-record future revenues. The company can also pre-record expenses that the company has to pay.
The loan tenure lasts over a year or more. Following are examples of a long-term corporate financing loan:
It is a form of debt instrument that doesn’t need any collateral. Instead, it considers the reputation and creditworthiness of the issuer. Its tenure can go over 10 years. Governments and big companies commonly use debentures to raise funds.
It converts a private corporate sector to the public. To do so, it issues the private sector’s shares to the general public. The financing type assures fundraising from external sources only. It helps your company to invest in new projects to enhance the corporation.
- Bank Loan:
It allows you to choose a medium or long-term loan option. Consider your company’s financing needs before making a choice.
In conclusion, corporate finance is vital for all company sizes. Financing plans help your business grow and enable it to spend wisely. You get a hold of where your investments are going and study their ROI. Most importantly, corporate financing keeps your company out of trouble with debts.
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