Introduction
Capital is the blood that keeps companies alive. To grow and sustain, all types of companies, whether small or large, require capital.
Capital requirements change as a company grows and expands. At every stage in a company’s development, a capital requirement helps to ensure that the business has enough money to operate.
A company may need capital for various reasons. It may need to buy machines and set up infrastructure to start production or market its products and services, it might also want to expand into a new location or require to meet growing working capital.
The capital requirements are different depending on the type of company, the type of business of the company, the industry they operate in, etc.
When corporations raise money for their capital requirements through debt, it is known as a corporate bond.
Currently, the Indian debt market is dominated by government bonds, and corporate bonds hold only a small share.
However, as per a report, the corporate bond market might reach Rs. 65-70 lakh crore, in 2025, from Rs. 33 lakh crore in 2020.
What are the Ways a Company can Raise Capital?
A company has numerous options when it comes to raising capital for its growth and sustainability.
A company can need money for the long-term, medium-term, or short-term.
- If a company needs capital for the long-term, it can raise capital through equity and preference shares, debt, retained earnings, etc.
- If the company wants to meet its medium-term requirements, it can raise capital through commercial paper, loans from a financial institution, lease financing, etc.
- Further, if the company needs capital for the short-term, it can raise capital through working capital loans, trade credit, etc.
Primary Sources of Funding Available for Companies
There are many sources of funding available to companies, as mentioned above; let us discuss a few of them.
1. Retained Earnings
Retained Earnings (accumulated earnings or reserves) represent the accumulated profit from the first day of business until now and can be used to support the company’s current capital requirements.
Retained earnings are that part of net profit that is kept aside and is not paid out as dividends to the shareholders.
If companies need funding for their expansion, they can use the retained earnings. This is because it is often more expensive for the company to raise capital from external sources(such as equity and debt), and retained earnings being an internal source is less expensive.
2. Equity
Equity is an external source of funding available for companies to use.
The term equity refers to a share or portion of a company. Equity is the capital raised by companies to finance the growth of their business through issuing shares. Companies may offer common or preferred shares to potential investors.
The company’s total worth is found by taking the total number of shares and multiplying them by the share price.
Equity funding is a popular source of funding for companies. This form of financing is attractive because, in addition to providing capital, it allows investors to share in the profits/loss of the company.
Further, it is a way to get funding that is free of interest payments and free of repayment obligations.
How can Bond Investment Meet Your Company Capital Requirements?
In addition to retained earnings and equity, companies can also raise money through debt.
A company can borrow money privately through bank loans or publicly by issuing corporate bonds.
Bonds are a method of raising long-term debt capital.
A bond is essentially a loan; the issuer borrows money (usually at an interest rate), and in return, the investor gets a fixed amount of interest every year. The bondholder has the right to receive regular interest payments and, most importantly, returns of the principal amount when the bond matures.
Bondholders are, therefore, considered the creditors of the company.
When public issues of bonds are done, they have to be rated by agencies like CRISIL (Credit Rating and Information Services of India Ltd.), Moody’s, Standard & Poor’s, to make sure the company has a good track record, is profitable, and will be able to pay back debts.
Benefits of Raising Money Through Bonds
There are some benefits of raising money through bonds:
- By issuing debt, companies will not have to share profit with investors.
- Some investors prefer bonds, as they provide a fixed return.
- It is suitable when income and profits are relatively stable.
- If companies want to avoid dilution of their equity but still want to get money from investors, they can issue bonds.
- Unlike stocks that carry voting rights, bonds do not have voting rights, so financing through bonds does not impact the control of the business.
Demerits of Raising Money Through Bonds
Some of the demerits of raising money through bonds are:
- If companies issue bonds, they have to pay interest to the bondholders, which puts a permanent burden on the company. Paying interest could be a greater risk if earnings fluctuate.
- When companies issue bonds, they reduce their borrowing capacity.
- If companies are unable to pay back their debt, they may go bankrupt.
Conclusion
In a nutshell, the capital requirement is the amount of money that a company needs to be to operate and grow its business.
Raising money is a complex process and is a big deal for any business. Not all companies are created equal, so it is essential to understand what type of funding is best for the company. There are different types of funding, and there are multiple ways to go about funding a business.
Raising money takes time, effort, and it comes with a lot of responsibility.
For investors, bonds are among the safest instruments in the market. In the present market, when the world is going through an economic downturn, investors are looking for a safe investment option. Bonds are one of those options that provide them security from market volatility.
However, investors have to be very careful in their decisions as the selection of the bonds is based on the individual understanding of their requirements. The investor is advised to take care of a lot of points while selecting the bonds as per their requirements.
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