There are two types of capital: debt and equity. These types are typically used in the life cycle of a company. Borrowers and investors have different goals, so they will consider various factors of the company when deciding whether to invest or lend.
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The debt shall be repaid within the specified time of the loan, and the borrower’s income shall be generated within the corresponding time. Loan sources include not only banks, but also leasing companies, Poly companies and even individuals.
The loan source mainly focuses on two factors: how risky the loan is, and whether the company can generate enough cash to pay interest and repay the principal. The growth potential of the company is secondary. The main consideration is the company’s performance record and asset base. Generally speaking, liabilities should be guaranteed by the assets of the company and the assets of the company owner, also known as individuals
guarantee
The company’s assets generally do not receive the full book value at the time of the loan. In other words, if the book value of the inventory is $50000(or $50000 is needed to produce the inventory), the lender will only give 50% to 75% of its value. The reason is that the source of the loan is not within your business scope, so you should quickly clear the position, rather than selling at the market price.
Receivables or amounts owed by customers who have previously purchased products but have not yet paid will also be discounted. For example, receivables worth $50000 may be only 60-70% of the original value of the loan. If external loan sources demand payment, customers may not be able to pay all their debts, or they may feel that they must pay all the costs for the product… The same general rules apply to equipment, land, buildings, furniture, fixtures and other assets owned by the company.
The borrower always requires the personal assets of the company owner to be mortgaged by accident and the belief of the owner. Obviously, if the owner of the company does not believe that the loan repayment ability of his company, why should the loan source do so?
Capital fund
Equity capital is the capital provided for part of the ownership of a company. Stocks can be provided by individual investors; angel ;, the sweat shares and contributions of venture capital companies, partners and founders. Equity providers are more interested in the growth potential of the company. Their goal is to invest a certain amount of money at present, and get a return of 5:1 or even 10:1 in three to five years. If the investment is suitable for the company, the current $100000 will be worth $1 million in three years. That is to say.
Because investors and borrowers have different goals, their evaluation factors when deciding whether to invest are different from those of loan sources. Investors like to invest in companies with rapid growth potential. The growth potential depends on the company’s management quality, product brand strength, barriers to entering competitors and product market size.
So, is it debt or equity capital?
The answer depends on several questions. Why do companies need additional capital? What stage is the company at? How is the company’s financial situation? How much money do you need? What restrictions do financing sources impose on the daily operation of the company? Finally, what is the impact of financing sources on corporate ownership?
Why does the company need additional capital?
The reason for the need for funds or the use of funds is not stock, but debt, and vice versa. Debt is generally the source of funds for the company’s daily operations or refinancing the current loans. Expansion capital can be debt or equity. Venture capital usually comes from equity sources. Reversing the situation, refinancing delinquent loans and covering the income deficit may be one of them, but in this case, financing will pay a high price.
What stage is the company at?
The growth of the company has gone through several different stages: seed stage, start-up stage, first stage and second stage. The company’s stage can be used as an indicator of related risks. Debt and equity are not prohibited at any stage, but the older the company is, the more mature it is, and the smaller the risk is.
Seed stage – although the idea of a product or company is in the mind of the entrepreneur, there is still a lot of research and development to confirm whether the idea is feasible.
Entrepreneurship – The company has a clear business plan, products and basic structure, but little or no income. The product may still be a prototype.
Stage 1 – The product is ready for launch or is generating some revenue. The company structure has been completed.
Phase II – Full scale production. The company’s products have been sold and accepted by the market. The company has prepared to launch this product or the second product nationwide.
Establishment – The company has been operating successfully for at least 3 years.
Into surplus. The company has operated for many years, but its performance is poor. A difficult reversal means that a company is not only depressed, but has been in a state of cash loss. Unless a major restructuring is carried out, there is little hope to return to a positive state.
How is the company’s financial situation?
In some cases, the financial situation of the company will show that one kind of capital is superior to another. If the company needs all the cash to support its growth, loans are impossible. Because the company cannot pay interest and principal. If the company only needs credit to fund the cyclical growth of orders, it is meaningless to introduce stock investors.
Borrowers view the asset base to obtain loans and recognize cash generated for interest payments. They also focus on the company’s other liabilities or liabilities and the owner’s liabilities and liabilities. The old saying that “loans are easiest to obtain when you don’t need them” is close to the truth. The strong borrowing compared with the performance is heavy, light and light, and financing is easier.
Investors review trends in business reports and balance sheets to understand the company’s health. Companies that have shown positive trends in the past have attracted much attention. But for investors, the future prospects of the company’s products and markets are as important as past performance. A company that is slightly shaken in the current prosperous industry may hope to achieve better results in an industry that is lower than that of stock investors.
But what if your company is a startup with a short history? Then check the other elements:
How much did the owner contribute to the company?
How strong the management is.
How management strives for success
You can use other proprietary assets, such as patents, trademarks, business rights, etc.
What are the barriers to entering the market?
although debt and equity have costs, the company must create enough cash to repay the loan principal and continuous interest expenditure. Shares are not required to be repaid on a fixed schedule. Stock investors are looking for long-term returns.
How much capital is required?
A small amount of capital needed in the short term is generally not attractive to traditional sources of debt or equity. The borrower is not interested in the loan. Because the cost of these loans is as high as the income that may be generated in the processing. Investors believe that what is needed to fund a small amount of capital is almost equivalent to funding a large amount of capital.
On the other hand, a large amount of capital can only be obtained by providing funds in stages on the basis of achieving the level of performance. For example, you have the idea of diagnostic testing, which will become a breakthrough in medicine and completely change the treatment of all diseases we know at present. But to bring the product to market, it will cost 3.5 million dollars. The initial funding may be only $50000 for literature and patent searches. Observe whether others are studying the same idea to determine the market demand scale of the product. If the search results show that no one else studies this idea, and the market is the office of all doctors in the world, the second phase of 500000 dollars can purchase laboratory equipment, hire laboratory technicians for six months, and hire consultants to develop business and marketing plans. If laboratory technicians develop prototype test equipment six months ago, they will receive a fund of 1 million dollars to develop working prototypes and apply for patents. If the working prototype is patented, $750000 can be used for FDA approval and independent testing.
What restrictions do financing sources impose on the daily operation of the company?
You should consider how the source of funds restricts the operation of the company. Loan contracts generally limit how the company handles excess cash. They can also limit the company’s expenditure amount and type, require the company to maintain a certain balance in its own account, collect receivables within a certain range, and even determine the credit policy the company provides to customers. Because of these limitations, enterprises cannot take advantage of specific opportunities.
Equity investors can require the same restrictions, even if they are in a minority position, they can also request veto power or approval of expenditure under specific circumstances.
What is the impact of financing on ownership status?
The last and most important question is how to deal with the dilution of ownership and management control. Investors can generally contribute experience, management expertise and capital, and have a vested interest in the success of the company. The source of the loan has no impact on the Company(except for any loan contract mentioned above); the main objective is to repay debt.
Is that debt or equity? This is your choice.
