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...

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…