Ways to borrow money from the market?
There are many ways to secure credit from the market
and two of the major ways include debt, equity and convertible debt. While looking
into opportunities to enter into new markets, a company generally applies for a
new line of credit referred to as debt capital which consist of coupon payments
as a payment option. But the best possible way to secure debt without
collateral is issuing bonds in the bond market where people invest based on the
creditability of the project and the failure of repayment comes when the
company goes into bankruptcy. Since the project is solid enough and has an
already established market, people will be interested in investing in debt securities
as they are looking to make more money when a company tries to invest in other
markets hoping for a better return from a developing economy. The other
advantages 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 based
on preset conditions, repayment can be converted into equity. It is a mash up
of debt and equity instrument which can help raise money faster than normal
debt securities. The most sought after financing is the form of equity where
projects can be funded by trading funds with partnership of the firm. There is
no repayment schedule but the disadvantage is that since each investor owns a
small piece of the company the mangers are forced to maintain profitability at
all times and pay up expected dividends.
One of the hottest solutions for raising capital
is crowdfunding. It’s exciting and incredibly public. With
crowdfunding, you’re giving away a product or service, not equity. If you hit
your goal, it’s your responsibility to make sure the promises you made are
delivered upon with exceptional products. If we are looking to
introduce a new product in the market which is innovative and will sell well in
the new markets, people will be ready to invest.
Who purchases corporate debt securities?
Generally, corporate bonds are traded in the over
the counter market, which is made up bond dealers all around the country who
indulge in trading securities over the phone or electronically. Some of the
bonds are traded in exchanges but the volume is small. The OTC market is very
large and vast majority of transactions occur here. People or investors who
generally buy corporate bonds include insurance companies, mutual funds, pension
funds, provident funds, large financial institutions, other companies and
banks. Some investors also include high net worth individuals and people with
modest incomes due to the higher interest with moderate risk.
How individuals become a part of the funding?
Small investors including common people invest
some part of their savings in mutual funds, term deposits with banks etc who in
turn collect these amount from a large section of the society and invest in the
corporate bonds to get returns for their customers. People also put a
substantial part of their income in pension funds and provident funds and fund
managers of these funds invest a part of these in corporate bonds for a stable
return. Also a lot of people buy insurance for health, life and term insurance
and the money is again invested in corporate bonds by these insurance companies
to get return for these bonds. So common people might not directly be involved in
purchasing 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 an
asset. It simply means, the borrower gets a loan against an asset and if he
defaults then the lender can use the asset to repay the funds it has given to
the borrower. Examples include mortgage loans, auto loans, etc. If the borrower
fails to repay then the lender might sell the car to recover the debt and
incase of mortgage the lender keeps equity on the house which he can use to
recover the money. Unsecured loans are those which do not have a collateral and
are based on the credit rating of the individual or business. It doesn’t have a
security and if the borrower defaults then the lender has to recover the money
via lawsuits. Such loans are issued based on the financial backing (income) of
the individual and his past history of repayment. They generally have high
interest rates like personal loans, credit cards, education loans etc whereas
Government T-bills generally carry lower interest because government has the capability
to 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 a
weighted average of various options available. Out of the $100 million, we aim
to 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 an
investment and rest $20 million can be raised from the bank using a line of
credit. Such a plan will enable us to utilize the money raised via debt and
equity for building infrastructure in the new markets and the rest along with
the bank line of credit and our cash surplus can be used for operational
expenses. Since the operating expenses will be recovered at the earliest when
we reach breakeven then it is sensible to borrow that amount from the bank as
it will carry little higher interest rates and can be amortized and repaid at
the earliest. It is in the best interest to utilize money from debt and equity
for capital expenditure as these are long term investments who will give
returns at a later part of the project’s life.