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More importantly, shareholders dilute a company’s ownership control as long as it sells more shares. However, one disadvantage of equity capital funding is sharing profits among all shareholders in the long term. Equity CapitalĬompanies can raise funds from the public in exchange for a proportionate ownership stake in the company in the form of shares issued to investors who become shareholders after purchasing the shares.Īlternatively, private equity financing can be an option, provided there are entities or individuals in the company’s or directors’ network ready to invest in a project or wherever the money is needed for.Ĭompared to debt capital funding, equity funding does not require making interest payments to a borrower. Failure to do so may lead the borrower to default or bankruptcy. The drawback of borrowing money through debt is that borrowers need to make interest payments, as well as principal repayments, on time. The companies will be then repaying the debt (principal and interest) according to the specified debt repayment schedule and contracts underlying the issued debt securities. Debt issues also include debentures, leases, and mortgages.Ĭompanies that initiate debt issues are borrowers because they exchange securities for cash needed to perform certain activities. In debt financing, the issuer (borrower) issues debt securities, such as corporate bonds or promissory notes. They can also source new funds by issuing debt to the public. Debt CapitalĬompanies obtain debt financing privately through bank loans. The retained earnings can be distributed to shareholders as dividends, or the company can reduce the number of shares outstanding by initiating a stock repurchase campaign.Īlternatively, the company can invest the money into a new project, say, building a new factory, or partnering with other companies to create a joint venture.

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It is the most primitive source of funding for any company.Īfter generating profits, a company decides what to do with the earned capital and how to allocate it efficiently.

Companies obtain equity funding by exchanging ownership rights for cash coming from equity investors.īusinesses aim to maximize profits by selling a product or rendering service for a price higher than what it costs them to produce the goods.

Businesses raise funds by borrowing debt privately from a bank or by going public (issuing debt securities).

Companies use retained earnings from business operations to expand or distribute dividends to their shareholders.The main sources of funding are retained earnings, debt capital, and equity capital.