Finance 3336

Companies always need money to their activities. They usually get this money through the profits earned each year but there are times that either are not making a profit or they need more money to make an important investment. Companies have different ways to get this finance: companies (especially small ones) can get the money they need by asking the bank, the problem this poses is that the interest rate charged by the bank is usually very high and always, whether profit or not, you must return the money year after year. Another form of financing is issuing bonds, this can only be done by big companies because it is very expensive and usually deliver large quantities of these to be profitable for the issuance, the bonds go to market at a certain price and company will pay an interest rate in a number of periods per year. The advantage of bonds is that interest paid is less than that paid to the bank and also those who have this bonds can return the money at any time in a secondary market. The problem is that they always pay a percentage even in a year without any profits. Finally we have the issue of shares, the company may issue shares to generate much cash flow increasing the equity. It is the best way of financing because it increase the equity but not the liabilities with banks or borrows, so that there will not be required to pay a percentage each time. There are also other forms of financing such as preferred stock, private loans, public financing, …
To conclude, companies have different ways of financing from which they can choose to get the money they need. Some have advantages that others do not have but without any doubt the best form of financing is to sell the shares because it generates fewer obligations.

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