Sources of Long Term Finance
In the previous article we discussed
the different types of long term finance. Today let us see how to raise long
term finance from various sources.
Firstly let us know the various
sources for long term finance from where we raise the capital or finance for the
business.
§ Venture Capital and Private Equity
§ Initial Public Offer (IPO)
§ Secondary Public offer
§ Right Issue
§ Private Placement
§ Obtaining of Term Loan
§ Investment Banking
Now let us understand about each source of long term finance in
detail one by one
§ Venture Capital and Private Equity:
A startup or a
company may not be ready to go for IPO so in order to raise the capital he may
approach a venture capitalist to fulfill the requirement of the capital
required for business. Venture Capitalist funds all types of companies. Usually
startup companies approach to VC for funding and VC funds those concepts of
startup that appears promising to him. Venture Capital is a fund that helps a
company to expand its operations before they are ready for the IPO. Venture
Capital investment represents the highly risky investment with high returns as
well. Usually a venture capital is in the form of equity.
§ Initial Public Offering:
IPO refers to
the company listing in Stock Exchange and then issuing the equity shares to the
public for the first time. It is one of the most important milestone in the
life of the company as it decides to transform from a closely held company to a
listed company in Stock Exchange.IPO is done in two form – one is issue of new shares
and the another is sale of the existing shares of a the investors. The benefits
of going public is that access to capital, respectability, investors recognition,
widow to opportunity, liquidity, market signals and diversification.
§ Secondary Public Offering
Most of the companies
their IPO is rarely last public offering as the company need capital for
expansion they need issue equity and debt. Such public issue offered to
investors at large is called as Secondary Public Offering. The process of
Secondary Public Offering is similar to the IPO.
§ Right Issue
A Right Issue
is an offering made to the existing shareholders of the through an offer letter
made in first instance for existing shareholders on a pro rata basis. However
shareholders may forfeit this right fully or partially so that company can
issue shares to the public and raise the additional capital by passing a
special resolution.
§ Private Placement
A private
placement is the issue of the shares to a specific group of people not
exceeding 49.Private Placement of Shares and Convertibles debentures by listed company
can be of two types – preferential allotment and qualified institutional placement.
Preferential allotment refers to issuing shares or debentures to a specific group
of person. Qualified Institutional Placement refers to issue of shares or
convertibles to qualified institutional buyers.
§ Obtaining of Term loan
Term Loan is
nothing put applying for loan from a bank or an institution.
§ Investment Banking
Investment Banking refers to
Merchant Bankers which help companies to raise capital, assist in during merger
and acquisition and restructuring. Investment Banks offer services like asset
management, stock broking, and investment advisory, risk advisory and custodial
services. In recent days investment banks have started helping their clients by
offering services like financial arrangements.
I hope now you are clear about how to
raise the finance for the business from different sources.
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