Corporate finance is the area in finance that deals with financing, capital, decision making regarding investments. It’s primarily concerned with how corporations acquire and invest funds to maximize shareholder value, via implementation of various strategies aiming for both short and long term goals of a company.
Corporations often raise their finances in two ways:
- Debt capital
This is a common way for companies to acquire capital; it includes bank loans, personal loans, credit cards all of which tend to have interest rates. All of these methods require the repayment of the loan according to an agreed payment plan and rate of interest. Unless, of course it comes as a personal favorite which is often unlikely.
People who lend money to business owners and corporations are known as debt holders, because the idea is that they will be repaid what they put in, which a certain markup and compounded interest.
2) Equity capital
This is what is commonly referred to as ‘investment’. Businesses gather investors who can purchase shares and stocks in the company, going on to become part owners through their investment. Ownership and control are not mutually exclusive, so businesses can operate independently of whoever owns them, or they can have investors on their boards and call the shots in decision making.
It all depends on the business plan and strategy; essentially the structure of ownership and control varies from company to company. Investors in the company expect to receive a share of the profits too, which is what differentiates them from debtholders. They’re not looking for a slight increase in what they put in, they’re looking for more sustainable returns and greater profits on what they’ve put in. For them, as the name suggests, it’s an investment, which is why they’re referred to as such.
Financing for corporations is not an easy task by any measure; you need a solid business plan and strategy to get investors or loans, no matter who’s lending you the money. Nobody wants to put money into something that has no solid plan, not even your closest friend. Learn more about strategizing and gathering investors by getting in touch with us.