One of the key aspects of business management is managing finances. Whether you own a small-scale or a large business firm, at some point, you may face issues relating to finances like how to manage the funds, whether you should apply for a loan, is a particular project worth investing in, etc. All these financial matters come under the gamut of corporate finance.
What is corporate finance?
In simple terms, corporate finance refers to the various decisions and strategies business owners undertake to keep their business afloat and/or to expand the business. It is also the study of how businesses make certain financial decisions, the different factors they consider, and other business finance-related principles.
Scope of corporate finance
Scope of corporate finance refers to the various business responsibilities and objectives that are dealt with under the corporate financing ambit. These objectives are related to maximising wealth creation and the scope for business expansion through sustainable methods. Some of the objectives under corporate financing include:· Prepare a budget for the expenses and allocate the funds in different projects and business areas tactfully to increase profit margins. · Analyse the market regularly to keep pace with the fast-evolving business trends and implement new practices in the business. · Making critical decisions about raising capital through reliable and effective sources based on in-depth market research. · Analyse different investment options by using the fundamentals of corporate finance. · Take timely and effective decisions to expand and diversify the company as per the growth trajectory.
Types of corporate finance
Generally, corporate financing is done in two ways – the business owners/partners/promoters can invest their own money, or they can borrow money from others. Let us know more about the different types of corporate finance.
Today, many companies, especially start-ups and small and mid-size entities, raise funds through angel investing. Angel investors are essentially high-net-worth individuals who invest their money individually or as a group in different firms. In return, they seek a share of the profit made by the business or get royalties.
Angel investors are also commonly referred to as seed investors, and they only invest money with the purpose of getting better returns; they don’t necessarily get involved in the company’s daily operations or management.
Equity investing is also known as ownership finance. Here the investors put their money into a business of their choice and, in return, get a percentage of ownership in the company. The company or the business owner does not have to repay the money they borrow, instead share the profits as per the agreed terms and conditions.
IPO (Initial Public Offering)
IPO happens when a listed company offers its shares to the public for the first time. In this corporate financing method, the companies or the business owners fix the share prices through a book-building process. Like ownership financing, in IPO, the businesses raise funds from the public and allow equity or preference shares. If the business makes a profit, then they get a part of the profit as per their equity or preference shareholdings.
In this corporate financing method, businesses raise capital from individuals with a high net worth or investment platforms. The investors get a percentage of ownership in the company they invest in proportion to the amount they invest.
Venture Capitalists (VCs) is generally a fund that is managed by a professional investment team that has experience in managing a portfolio across asset classes. After the company raises funds through angel investing during the seed stage and is attracting further rounds of funding. This is where venture capitalists come in, as this is the most feasible route for start-ups to get additional funding.
When the business borrows funds from an external source, it is referred to as debt funding. Here, the company borrows money from different financial institutions and repays the same with interest. There are different types of debt financing, including bank loans, merchant loans, and debentures.
Business Loan – In this type of corporate financing, businesses avail of credit from financial institutions for a specific period. Another effective way to raise funds for business is through a bank overdraft facility.
Merchant Loans – When businesses take commercial loans from non-banking financial institutions or other lenders than banks, it is termed merchant loans.
Finance is an integral part of any business, and all business entities must consider several factors before making any financial decisions, as they can have a direct impact on growth. Understanding the different types of corporate finance can help businesses use the right channel to raise funds as per their needs.