Capital, or money, is required by large and small companies for their daily operations. The companies can also use capital for expansion needs, new product development, and research activities. Capital can also be used for investing in other companies, acquiring stakes in new or existing companies with promising business opportunities, conducting marketing research, paying off debt, etc.
Companies can generate funds or capital through two sources: equity and debt capital. Both forms of capital involve costs. However, there are differences between the two types of capital. Financial experts at Joseph Stone Capital will help businesses in need of capital choose low-cost funds and improve their profitability.
Need to repay at a later date with interest
The companies that borrow capital from banks and private investors in the form of loans need to be repaid along with accrued interest at a later date. It is called debt capital. It could be either a long-term or short-term arrangement. Companies raising funds through loans will not dilute their ownership. However, it could be a burden when repaying the principal along with interest.
The companies are obligated to pay interest on the loans before offering dividends to their shareholders. Therefore, priority needs to be given to repayments. Businesses can use loans to grow their product and service offerings and earn huge profits. The lenders will receive interest on the amount lent to companies at regular intervals, as agreed at the time of offering loans.
The cost of debt capital is high. Businesses, which are in trouble, will face difficulties in getting loans from traditional lenders because of stringent requirements like providing collateral. If a business takes a loan of $200,000 with an interest rate of 8%, the cost of that loan is 8%. Businesses can account for interest paid on borrowed capital by showing it in corporate tax. You can compute the cost of the borrowed capital using the formula 0.08 x (1–0.03) if the corporate tax is 30%.
SBA guaranteed loans
Sources of debt capital other than banks include consumer finance companies, credit unions, relatives, leasing companies, insurance companies, trade credit, commercial finance companies, and factoring companies. Small businesses can also obtain loans from the federal and state governments.
Small businesses can get loans of up to $750,000 from banks and other lenders with guarantees from the SBA. They can qualify for such loans if their loan requests are turned down by regular channels. The financial experts at Joseph Stone Capital can offer help in estimating your business prospects, making documentation for loans, and meeting other collateral requirements to get low-cost loans.
Small businesses can use the proceeds of loans granted with the guarantee of the SBA for the purchase of new equipment, inventory, real estate, and business expansion. The SBA also offers direct loans of up to $150,000 for small businesses. Small businesses can also obtain trade credit from suppliers. It allows them to make delayed payments for inventories and get the raw materials in time.
Equity Capital
Large and small businesses can also obtain equity capital. In this case, the shareholders will have control over the business operations. The companies can raise funds through the sale of common stock to institutional investors and the general public. Finance professionals will help companies raise funds through an IPO or stake sale to large investors. The companies need not pay interest or repay the capital.
