Ways to borrow money from the market?There are many ways to secure credit from the marketand two of the major ways include debt, equity and convertible debt.
While lookinginto opportunities to enter into new markets, a company generally applies for anew line of credit referred to as debt capital which consist of coupon paymentsas a payment option. But the best possible way to secure debt withoutcollateral is issuing bonds in the bond market where people invest based on thecreditability of the project and the failure of repayment comes when thecompany goes into bankruptcy. Since the project is solid enough and has analready established market, people will be interested in investing in debt securitiesas they are looking to make more money when a company tries to invest in othermarkets hoping for a better return from a developing economy. The otheradvantages include a broad investor base, tradable bonds, lesser terms and conditions,flexible interest payments dictated by you, etc.We can also go for convertible debt where basedon preset conditions, repayment can be converted into equity. It is a mash upof debt and equity instrument which can help raise money faster than normaldebt securities.
The most sought after financing is the form of equity whereprojects can be funded by trading funds with partnership of the firm. There isno repayment schedule but the disadvantage is that since each investor owns asmall piece of the company the mangers are forced to maintain profitability atall times and pay up expected dividends.One of the hottest solutions for raising capitalis crowdfunding. It’s exciting and incredibly public.
Withcrowdfunding, you’re giving away a product or service, not equity. If you hityour goal, it’s your responsibility to make sure the promises you made aredelivered upon with exceptional products. If we are looking tointroduce a new product in the market which is innovative and will sell well inthe new markets, people will be ready to invest.Who purchases corporate debt securities?Generally, corporate bonds are traded in the overthe counter market, which is made up bond dealers all around the country whoindulge in trading securities over the phone or electronically. Some of thebonds are traded in exchanges but the volume is small. The OTC market is verylarge and vast majority of transactions occur here.
People or investors whogenerally buy corporate bonds include insurance companies, mutual funds, pensionfunds, provident funds, large financial institutions, other companies andbanks. Some investors also include high net worth individuals and people withmodest incomes due to the higher interest with moderate risk.How individuals become a part of the funding?Small investors including common people investsome part of their savings in mutual funds, term deposits with banks etc who inturn collect these amount from a large section of the society and invest in thecorporate bonds to get returns for their customers. People also put asubstantial part of their income in pension funds and provident funds and fundmanagers of these funds invest a part of these in corporate bonds for a stablereturn. Also a lot of people buy insurance for health, life and term insuranceand the money is again invested in corporate bonds by these insurance companiesto get return for these bonds. So common people might not directly be involved inpurchasing of these bonds but indirectly through banks and other institutions (insurance,mutual funds, etc) invest in a small portion of their savings in corporate bonds.Secured vs Unsecured Lending Options: Secured debts are those debts which are backed up by anasset. It simply means, the borrower gets a loan against an asset and if hedefaults then the lender can use the asset to repay the funds it has given tothe borrower.
Examples include mortgage loans, auto loans, etc. If the borrowerfails to repay then the lender might sell the car to recover the debt andincase of mortgage the lender keeps equity on the house which he can use torecover the money. Unsecured loans are those which do not have a collateral andare based on the credit rating of the individual or business. It doesn’t have asecurity and if the borrower defaults then the lender has to recover the moneyvia lawsuits. Such loans are issued based on the financial backing (income) ofthe individual and his past history of repayment.
They generally have highinterest rates like personal loans, credit cards, education loans etc whereasGovernment T-bills generally carry lower interest because government has the capabilityto increase taxes and mint money to pay back its loans.Process to raise funds for the Corporation:It will be safe for us to raise funds using aweighted average of various options available. Out of the $100 million, we aimto raise $50 million by issuing debt securities. Out of the rest $50 million,$30 million will be raised by equity, $10 million from our cash surplus as aninvestment and rest $20 million can be raised from the bank using a line ofcredit. Such a plan will enable us to utilize the money raised via debt andequity for building infrastructure in the new markets and the rest along withthe bank line of credit and our cash surplus can be used for operationalexpenses.
Since the operating expenses will be recovered at the earliest whenwe reach breakeven then it is sensible to borrow that amount from the bank asit will carry little higher interest rates and can be amortized and repaid atthe earliest. It is in the best interest to utilize money from debt and equityfor capital expenditure as these are long term investments who will givereturns at a later part of the project’s life.