Aim: How do Corporations raise Capital?

The Need for Money All business owners need money to survive… just like people need blood to survive. Money is the “lifeblood of business”. Businesses both big and small need capital to flow in order to meet obligations and to grow. If the capital is interrupted the business would get sick and die.

The Need for Money Businesses need capital to: Meet their everyday expenses: Payroll, rent, utilities Replace and expand their inventory Expand and grow Meet the interest payments on their debts Businesses get their money from: Their personal savings Borrow the money Sell more stock to outside investors

Short Term vs. Long Term Financing Short term financing applies to loans that must be repaid within 1 year. Long term Financing generally must be repaid during a period of more than 1 year. Trade Credit: Supplers generally give business owners 30 to 90 days to pay for their orders. This is the most common type of short term financing. Bank Loans: Banks loan businesses money on a promissory note or a line of credit. Promissory Note: A written promise to repay a loan with interest by a specified date Line of Credit: A business can borrow a sum of money at any time up to a certain limit whenever it needs the money. Repayment terms are part of the line of credit contract.

Long Term Financing Long Term Loans: These loans are usually used to purchase new machinery and other equipment. Businesses must put up “Collateral” or something of value that the lender may seize if the business fails to make their payments. Bonds: An I.O.U. Bonds are a promise by a corporation or government to repay a specified sum with interest at the end of a specified time period. Corporate Bonds: If a company declares bankruptcy it has to pay off bondholders first, then other creditors, and if any money is left then its stockholders will be paid. Government Bonds: Government generally sell savings bonds. Someone can purchase a savings bond for $25 and in ten years that bond may be cashed in for $50. If it is cashed in early then only the original value is paid.

Long Term Financing (Cont.) Equity Financing: This type of financing is when a corporation sells shares of its stock as a means to raise capital. These shares are generally bought and sold on the Stock Exchanges such as the New York Stock Exchange. Common Stock: Most stocks are common stocks. The purchasers generally have a voice in the selection of a board of directors and will see profits from their purchase through dividends. Preferred Stock: Purchasers of stock have no vote in the corporation but they are entitled to receive dividends.