Raising capital for a business can prove to be a challenge, and many business owners find themselves in the credit crunch. However, there are two main ways that can be used to raise the capital: Equity and debt. These methods are normally used by business owners and large companies throughout the company’s lifetime. The investors will have a different perspective as compared to the lenders. The lenders will, therefore, consider different factors when deciding whether to loan a company the money, or not. When a company decides to borrow money for its finance, a business plan has to be formulated first.
In other words, debt is money borrowed. The money, however, must be repaid at the agreed time and must be able to generate the lender income over the rent the period. There are many lending sources that one can choose. They include banks, factoring companies, leasing companies as well as individuals. When lending money to a company, the lender will consider two factors: whether the company is capable of generating enough money to pay the principle amount as well as interest and the level of the loans risk. The lender will also consider the growth of the company, the assets of the company and its track record, but this come secondary.
The debt has to be secured, and this is done through the company’s assets and the company owner’s assets. The owner is referred to as the personal guarantor. When securing the loan, the company’s assets will not be given full book value. This is because the lender is not in the borrowers business and will have to liquidate the assets instead of selling them at market prices. Therefore, if the company’s inventory is $50,000, the lender will only give the company 50%-75% of the value. Choosing the debt option to finance a company has its advantages. The lender does not share in the company’s profits. All that is given to him is the loan payment. Another advantage is that the method will still allow full control of the company as well as the decision making process as there are no partners that require answers. The disadvantage is that if the payment is delayed, the credit rating of the company is ruined which makes it hard to borrow money in the future. If the money is borrowed from friends and family, not paying the loan on time may strain the relationships.
Equity is the money obtained from a share of a company’s ownership. Equity is provided by venture capital company’s individuals also known as angel joint venture partners, as well as the sweat equity and money contributed from the company founders. Unlike in debt method, the people providing equity are more focused on the company’s growth. Their main aim is to invest in the company and be able to get rewards 5 times or 10 times more in a period of three to five years. The concerns of the equity lender and that of a debt lender are very different; therefore, the factors evaluated when determining if they will invest are different. The equity lender will invest in a company that has shown rapid growth or has the potential to do so. The growth potential of the company may be determined by assessing its management quality, the strength of its products, the size of the market and the competitor’s strengths.
One of the advantages offered by the equity method is that one is able to use the initial capital together with that of investors for startup costs. It also eliminates the burden of having a debt. If the investors are informed that they are taking a risk when investing their money in the company, they will understand if the firm fails and inhibit them from getting their money back. Some of the investors are able to offer valuable professional skills that are not available in the company. When starting up a new business, this may come in handy. It is, therefore, advisable for one to choose the investors wisely. The method, however, has its disadvantages. The investors are thought-out to be partial owners of the company; therefore, the company is expected to act according to their interests. Failure to achieve this may result in lawsuits.
When Nike Inc.’s fiscal year came to a conclusion in February, the company reported strong numbers for the last quarter year. The company’s revenue grew with 9% as compared to the previous year. The company is expected to continue its growth in the market and the stock trading at 23 times. The analysts are also expecting earnings of $3.06 per share at the end of the 2014 fiscal year. Despite Nike Inc. being a strong brand name, this figure seems to be quite high. In order for it to justify the evaluations, it will have to reach sell side target for the current year as well as the next one and later maintain its double digit growth pace in the EPS for a few years. This shows that the company is yet to prove itself and for this reason I would not buy the company’s shares.
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