Different Types of Financing
Cash flow is the life blood of organizations; a sentiment that supports the impression that cash is a ‘King’ in organizations. The nature of the cash flow defines the failure or the success of a business entity (Tigue, 2005). Organizations engage diverse sources of financing in supplementing the cash flow. This paper considers issuing of bonds type of financing, borrowing from banks type of financing and equity financing.
Advantages of issuing of bonds identify with; medium dated and short dated bonds have a low volatility as compared to stocks or equities, hence safe mode of investment (Tigue, 2005). Interest rates of bonds are higher than payments of dividends. Other advantages are that bonds are liquid and that the shareholders are protected legally. Disadvantages of bonds are pegged on the fact that bonds have prepayment risk, risk of interest rate, credit risk, liquidity risk and reinvestment risk (Tigue, 2005).
Organizations may borrow finances from banks (Fabozzi & Fabozzi, 2008). Advantages on bank loans are: loans are secured fast and that cash from banks can be used in different ways. Disadvantages of bank loans identify with: bank terms are stifling, high fees allocated to extra costs, transactions have diverse limitations and that bank loans highly depend on the cash flow (Fabozzi & Fabozzi, 2008).
Equity financing originates from savings and investments from friends and family (Morgan, 2009). Advantages of equity financing is that the organization has no debts attached, risks of interest is minimized since the lenders are aware of failed business if it happens, and that investors may offer important business decisions for free. Disadvantages are pegged on the fact that investors own part of the business, where some profits must be directed to them. The business owner must act to own interest and also to the interests of the investors. Lenders have control of the business issues basing on the contributions (Morgan, 2009).
Fabozzi, F. & Fabozzi, F. (2008). Bank Loans : Secondary Market and Portfolio Management. Hoboken, New Jersey: Wiley.
Morgan, J. (2009). Private Equity Finance: Rise and Repercussions . Basingstoke: Palgrave Macmillan.
Tigue, P. (2005). Structuring and Sizing the Bond Issue (A Practitioner’s Guide to Effective Debt Management). Chicago: Government Finance Officers Association.
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