When you’re the boss of a company, you have to run it so that it’s profitable. Sometimes you need extra capital, and there are different ways of raising it. In terms of seeking investors, there are two main instruments you can do it with: shares and (corporate) bonds. Which one do you go with?
Shares — your flexible friend
The benefit of shares is that if you’re running a highly profitable company, there’s greater chance of people investing it. Better still, they’ll be willing to invest more. This generates more capital for you, the CFO, and the COO to work with.
Shares can also create more solutions in times of corporate or general financial strife. You have more options to help keep the company afloat. You can split shares. You can buy back shares. You can issue more of them.
A special benefit of being a share-issuing company is that your underlying allows you to use other derivatives to benefit your company’s finances. You can grant options or obligations for people to buy your shares or products at more favourable prices (to you). Hedging like this can work to your advantage in international trade, especially with businesses in regions or countries that export lots of oil, like Egypt and the Middle Eastern countries. International banks like HSBC can advise you more on this, if ever you need you consider this option.
Who has the right?
Remember that shares aren’t only financial instruments: they’re a set of rights. You might be the boss, but you won’t have the whole say in the company’s financial affairs. If you sell shares, you grant the holders some influence in certain financial aspects of the business. Common shares give the shareholders the right to vote in shareholder meetings, whereas preference shareholders sit higher on the list of priority creditors if the company runs into difficulties.
The good news is that despite having a dividend policy (if you have one) you don’t always have to pay dividends. The shareholders may vote to reinvest profits back into the company (as mentioned, they have a say).
The important thing to remember is that if you issue bonds, you’re placing your company in debt. Not in the red, no, but you’ll have creditors. The thing with corporate bonds, too, is that you’ll have to pay back the loan capital and also a higher rate of interest. If you have a high default risk, you’ll have to pay a higher rate of interest.
Not only that, time is money. You must pay the money back within a specific timeframe. Shares are more flexible… to the point that you may never even have to pay the original capital back.
Bond issues are, however, are a good way to acquire short-term capital. You can acquire long term capital with them, of course, but this isn’t profitable: the longer the term, the more interest you have to pay. You’re in business to make as much money as possible, so these payments aren’t welcome.
When raising capital for the company is on the agenda and the debate boils down to bonds versus shares in the board room, these are the main things to consider. Of course, the other option is to mix the two, preferably obtaining more of this capital from shares. They give you more flexibility— and with flexibility can come more profitable decisions. Ultimately, the choice is yours.
For more information on shares and bonds, you can visit the U.S Securities and Exchange Commission website.