According to sub-categories, there are two types of corporate financing: debt financing and equity financing.
Also called debt financing bond financing is paid with funds outside the enterprise as a mode of financing. Including: bank loans, short-term bank financing (notes, accounts receivable, credit, etc.), corporate short-term financing bonds, corporate bonds, asset-backed and long-term bond financing, financial leasing, government subsidized loans, intergovernmental loans, the World financial organizations and private debt funds and so on.
Debt financing that the funds, corporate funds first to bear interest, in addition to the bond after the expiration of the loan funds to repay the principal. Determine the characteristics of debt financing of its main purpose is to solve the problem of shortage of working capital, and not for capital account expenditure; equity financing is the company's shareholders are willing to give up part ownership of enterprises, by way of introduction of new enterprises to increase the shareholder financing. Funds received equity financing, business without debt, but the new and old shareholders, the shareholders will share the same corporate profitability and growth. Determine the characteristics of equity financing the breadth of its use, both to enrich the working capital of enterprises, enterprises can also be used for investment activities.
Debt financing - Features
1, to obtain debt financing only the right to use the funds rather than ownership, the use of debt financing has a cost, companies must pay interest and principal of the debt due to be returned.
2, debt financing can improve the business ownership rate of return on capital funds, with financial leverage.
3, compared with equity financing, debt financing, except in some specific cases, the creditor may bring control of the business and the issue of intervention, generally do not have control of the business right.
Debt Financing - Advantages:
The benefits of debt financing is not related to your equity, and not related to the management of your property and you can still keep your own independent business and project operation. However, the financial institutions to provide debt financing for high-quality business and are quality projects, requires companies to have a certain amount of credit support and cash flow, debt financing Shihai need to have adequate security, this is precisely the difficulty of debt financing has become. In particular, debt financing is generally short duration, can only be used to make up for the purpose of liquidity, "position" of the lack of suitable new projects, especially long payback period and the slow effect of the project.
In general, short-term liquidity from operations borrowing requirements, enterprises should make maximum use of commercial credit on credit and other ways to reduce the amount of foreign short-term borrowed funds. Must be short-term funds borrowed from outside the enterprise to carefully prepare the cash budget based on the due repayment plan, then a more favorable interest rates for short-term financing (such as credit, revolving credit agreement, etc.), must not be hastily short-term financing, not debt when due by the high cost of high-risk Shiyou long-term financing to repay short-term debt. This will inevitably lead to deterioration of the financial position and financial risk increases.
Debt financing in the investment and management company has the following advantages:
(1) The Bank has the advantage of information gathering. Banks with the means to collect and analyze their business investment, management, distribution, income status, while in a relatively long period of investigation and supervision of enterprises, to help prevent "moral hazard" to appear.
(2) banks with the economies of scale analysis of information characteristics. On the one hand, the banks collect the same information with economies of scale effect on the other hand, analysis of large amounts of information itself also has economies of scale.
(3) long-term "professional" financial activities, financial institutions, the development of a set of professional skills.
(4) bank control of the business is a camera control. The role of debt is: when the companies can repay the debts, control rests in the hands of business, if the company does not pay off the debt, control is transferred to the banks.
Investment and debt financing in the corporate operational deficiencies
Liabilities will help control the operator's "moral hazard", but the corporate use of debt financing may also lead to the shareholders of the "moral hazard", the shareholders of this "moral hazard" behavior mainly in:
(1) the existence of shareholder wealth will be transferred to the creditor's incentives in their hands, means there are two, one is to use the equity policy of avoiding the debt. In the case of investment can not be changed, shareholders and managers can raise debt funds as a source of dividend payments, distribution to shareholders; and investment policies can be changed in the case of shareholders and managers may reduce investment to increase the dividend. The second is the asset substitution behavior (asset substitution effect). In the context of limited liability of shareholders, managers may be in the investment decisions to abandon low-risk and low return investments and the choice of high-risk high-yield investment, resulting in an alternative behavior, so that creditors faced a big risk.
(2) shareholders and corporate managers are likely to give up because of debt over the shareholders benefit of creditors, the phenomenon of under-investment projects, so that creditors suffer losses.
From the above analysis shows that: equity financing and debt financing in the risk control their own advantage, but the two kinds of financing for business risk, and thus control the risk of the financial system there are some flaws. Help curb corporate debt financing for equity financing and moral hazard caused by the managers, but may lead to the occurrence of moral hazard behavior of shareholders. Therefore, managers and shareholders for the establishment of an effective incentive and restraint mechanisms, the amount of corporate debt financing must be selected in the two types of moral hazard to minimize levels. Simply prefer a choice of financing and financial risk management can not achieve the purpose, there are only two ways of rational choice and combination of financial risks in order to increase assurance mechanisms.
Debt financing - the risks and pitfalls
Debt financing, equity financing relative to the risks faced by relatively simple, there are security risks and financial risks. Debt financing as the main channel of the bank loans are generally three ways: credit loans, mortgages and secured loans, in order to reduce risk, bank secured loan is most commonly used form.
Enterprises to borrow from the bank, first looking for a certain economic strength of companies do guarantor for bank loans together with the responsibility to bear, when private companies looking for security company, often the other requirements do you have promised to guarantee bank loans to each other this behavior is called mutual insurance. Easy to make a lot of mutual guarantee companies, forming a circle, a circle of business once the operational problems, it may cause a chain reaction, leading to other companies facing serious debt danger.
Financial risk primarily refers to the balance sheet structure problems, when companies use debt for financing, the financial cost increase will cause great pressure of business, in theory, the net assets of businesses reach profitability if borrowing rates, corporate borrowing will cause losses to the company shareholders. But more importantly, debt financing will increase the company's asset-liability ratio, and thus reduce the ability of debt financing again, if companies can not profit by reducing operating assets and liabilities, and get enough cash flow to repay maturing debt , the consequences may be waiting for corporate bankruptcy. Shi Yuzhu Giant Group brilliant once a few years ago by the verge of collapse, it is important not to do one of the reasons is that the management of debt financing.
