Finance can be tricky at times, but managing it thoughtfully
can bring you profits.
we talk about finance in business terms, we generally talk
about debt and equity, although there are a number of hybrids
of each. When we relate to Debt finance, it is usually secured
against an asset or group of assets (the assets used as security
could be plant and machinery, stock or debtors or a combination
of all three), whilst equity, which is a risk capital, wherein
the investors bears the risk of losing its money if the company
Debt finance basically
includes bank overdrafts, invoice discounting and loans. In
case the company winds up, the lending institution
will take charge over the assets – this could be fixed
or floating charge. However, the difference for the charge is
debtors right to receive repayment of the monies due. But to
an equity investor, the right to appoint a receiver is not available.
In Debt finance interest is charged on the outstanding loan whether
the business is profitable or not. There may come a time in the
development of a business when a company cannot borrow any more
debt, maybe due to a lack of security, it is then that the company
may consider raising equity.
On the other hand, Equity finance includes ordinary shares and
preference shares. In Equity finance investors subscribing for
equity do not have the security available to the debt funders
and consequently bear the majority of the risk, should the business
not be as successful as projected. Similarly, should the business
exceed expectations, it will be the equity investors (primarily
the ordinary shareholders) who will benefit the most.
However, the cost of finance will depend upon the risk the funder
is taking by lending or investing in the company - the higher
the risk, the more the finance will cost. Also, there are additional
costs of the finance like fees towards financial advisers, lawyers,
accountants particularly where equity investment is required.