Ways to borrow money from the market?There are many ways to secure credit from the marketlike debt and equity. While looking into opportunities to enter into newmarkets, a company generally applies for a new line of credit referred to asdebt capital which consist of coupon payments as a payment option. But the bestpossible way to secure debt without collateral is issuing bonds in the bondmarket where people invest based on the creditability of the project and thefailure of repayment comes when the company goes into bankruptcy. Since theproject is solid enough and has an already established market, people will beinterested in investing in debt securities as they are looking to make moremoney when a company tries to invest in other markets hoping for a betterreturn from a developing economy. The other advantages include a broad investorbase, tradable bonds, lesser terms and conditions, flexible interest paymentsdictated by you, etc (Smith,1988).We can also go for convertible debt where basedon preset conditions, repayment can be converted into equity.
It is a mash upof debt and equity instrument which can help raise money faster than normaldebt securities (Smith, Clifford W). The most sought after financing is theform of equity where projects can be funded by trading funds with partnershipof the firm. There is no repayment schedule but the disadvantage is that sinceeach investor owns a small piece of the company the mangers are forced tomaintain profitability at all times and pay up expected dividends.One of the hottest solutions for raising capitalis crowdfunding.
It’s exciting and incredibly public. With crowdfunding,you’re giving away a product or service, not equity. If you hit your goal, it’syour responsibility to make sure the promises you made are delivered upon withexceptional products. If we are looking to introduce a new product in themarket which is innovative and will sell well in the new markets, people willbe ready to invest.Who purchases corporate debt securities?For the most part, corporate securities areexchanged the over the counter market, which is made up security merchants allaround the nation who enjoy exchanging securities via telephone orelectronically. A portion of the bonds are traded in exchanges however thevolume is little. The OTC market is expansive and lion’s share of exchangeshappen here. Individuals or speculators who for the most part purchasecorporate securities incorporate insurance agencies, mutual funds, pensionfunds, provident funds, financial institution, different organizations andbanks.
A few speculators include high net worth people and individuals withhumble earnings because of the higher enthusiasm with moderate risk.How individuals become a part of the funding?Small investors including common people investsome part of their savings in mutual funds, term deposits with banks etc who inturn collect these amount from a large section of the society and invest in thecorporate bonds to get returns for their customers. People also put asubstantial part of their income in pension funds and provident funds and fundmanagers of these funds invest a part of these in corporate bonds for a stablereturn. Also a lot of people buy insurance for health, life and term insuranceand the money is again invested in corporate bonds by these insurance companiesto get return for these bonds. So common people might not directly be involvedin purchasing of these bonds but indirectly through banks and other institutions(insurance, mutual funds, etc) invest in a small portion of their savings incorporate bonds.
Secured vs Unsecured Lending Options: Secured debts are those debts which are backed up by anasset. It simply means, the borrower gets a loan against an asset and if hedefaults then the lender can use the asset to repay the funds it has given tothe borrower. Examples include mortgage loans, auto loans, etc. If the borrowerfails to repay then the lender might sell the car to recover the debt andincase of mortgage the lender keeps equity on the house which he can use torecover the money. Unsecured loans are those which do not have a collateral andare based on the credit rating of the individual or business.
It doesn’t have asecurity and if the borrower defaults then the lender has to recover the moneyvia lawsuits. Such loans are issued based on the financial backing (income) ofthe individual and his past history of repayment. They generally have highinterest rates like personal loans, credit cards, education loans etc whereasGovernment T-bills generally carry lower interest because government has thecapability to increase taxes and mint money to pay back its loans (Booth , 1986).
Process to raise funds for the Corporation:It will be safe for us to raise funds using aweighted average of various options available. Out of the $100 million, we aimto raise $50 million by issuing debt securities. Out of the rest $50 million,$30 million will be raised by equity, $10 million from our cash surplus as aninvestment and rest $20 million can be raised from the bank using a line ofcredit. Such a plan will enable us to utilize the money raised via debt andequity for building infrastructure in the new markets and the rest along withthe bank line of credit and our cash surplus can be used for operationalexpenses. Since the operating expenses will be recovered at the earliest whenwe reach breakeven then it is sensible to borrow that amount from the bank asit will carry little higher interest rates and can be amortized and repaid atthe earliest.
It is in the best interest to utilize money from debt and equityfor capital expenditure as these are long term investments who will givereturns at a later part of the project’s life.