Business Financing and Capital Structure

Finance Capital Business Financing and the Capital Structure In finance, capital structure is used to refer to the manner in which a corporation finances its assets through some mixture of equity, debt, or hybrid securities (Atrill & McLaney, 2011). A firm's capital structure is the configuration or structure of its long-term liabilities and each firm can choose a different configuration depending on its industry and/or its specific needs. Basically, a company has two choices in traditional capital financing.

The company can either sell equity, usually through the issuance of stocks or bonds, or it can sign a note with more of a traditional lender such as a bank in which a specific payment structure will be associated with the loan. Each manner of financing capital has different strengths and weakness that be relevant to a company depending on their circumstances and their goals.

This analysis will briefly outline some of the advantages and disadvantages that are inherent in these choices as well as some recommendations for a business in today's market. Advantages and Disadvantages of Capital Structures The debt and equity methods of financing capital have many different strengths and weakness that may vary in different circumstances as well as in different industries. One of the first things to consider is the time frame that is desired to repaying the loan.

For example, it is easier to finance things like short-term debt with debt financing. It is simply more convenient and practical to borrow from a traditional lending institution for a short-term loan than going to the market to issue stocks or bonds. However, if the financing is needed over a longer term or if it is a bigger amount then this could justify an equity financing arrangement.

One of the main advantages of equity financing is that it can offer a business more flexibility in repaying the loan since it is tied to income such as the case in issuing stocks. For example, if a company's profits are down then its stock liabilities would be smaller. In the case of bonds, a company can generally finance a larger need than with a traditional source.

Furthermore, bonds make it easier to change ownership after the financing is funded because people can simply buy and sell their bonds on the market because these assets are typically liquid. In many cases it is a good idea to have a professional investment banker assist in the financing arrangement. The role of an investment bank can be summarized by this description (Kuhn, 2011): "Investment banks facilitate flows of funds and allocations of capital. They are financial intermediaries, the critical link between users and providers of capital.

They bring together those who need money to invest (e.g., corporations that build factories and buy equipment) with those who have money to invest (e.g., institutions that manage money for pension plans), and they make the markets that allocate capital and regulate price in these financial transactions (i.e., who gets how many dollars, with what terms and at what cost)." Thus an investment banker can usually be an effective intermediary that can facilitate funding from many different sources and can offer a broad range of options for financing.

The historical differences in stocks and bonds can be best explained by the levels of risk that are inherent for both the buyers and sellers of these financial instruments. For example, stocks have the least risk for companies since they are tied to the company's performance and the repayment is flexible since it is tied to company performance. However, this increases the risks to the stock holder and thus they are often awarded a.