What are the sources of funding available for companies?

By Investopedia Staff AAA
A:

Despite all the differences among companies, there are only a few sources of funds available to all firms.

1. They make profit by selling a product for more than it costs to produce. This is the most basic source of funds for any company and hopefully the method that brings in the most money.

2. Like individuals, companies can borrow money. This can be done privately through bank loans, or it can be done publicly through a debt issue. The drawback of borrowing money is the interest that must be paid to the lender.

3. A company can generate money by selling part of itself in the form of shares to investors, which is known as equity funding. The benefit of this is that investors do not require interest payments like bondholders do. The drawback is that further profits are divided among all shareholders.

In an ideal world, a company would bring in all of its cash simply by selling goods and services for a profit. But, as the old saying goes, "you have to spend money to make money," and just about every company has to raise funds at some point to develop products and expand into new markets.

When evaluating companies, it is most important to look at the balance of the major sources of funding. For example, too much debt can get a company into trouble. On the other hand, a company might be missing growth prospects if it doesn't use money that it can borrow.

For more info on evaluating companies, check out Intro To Fundamental Analysis.

RELATED FAQS

  1. How does additional equity financing affect existing shareholders?

    Learn about how equity financing affects existing shareholders. By issuing and selling shares on the open market, equity ...
  2. How do the C-suite members work together to make a successful company?

    Learn more about the C-suite titles and how the executive team successfully runs a large or small organization. Find out ...
  3. What rights do all common shareholders have?

    Learn what rights all common shareholders have, and understand the remedies that can be taken if those rights are violated ...
  4. Why is a shareholder rights plan called a "poison pill?"

    Discover why shareholder rights plans are often called "poison pills" to fight hostile takeovers and give smaller corporations ...
RELATED TERMS
  1. Value Of Risk (VOR)

    The financial benefit that a risk-taking activity will bring ...
  2. Business Judgment Rule

    A legal principle which grants directors, officers, and agents ...
  3. Separation Of Powers

    An organizational structure in which responsibilities, authorities, ...
  4. Protected Cell Company (PCC)

    A corporate structure in which a single legal entity is comprised ...
  5. Registered Holder

    Shareholders who hold their shares directly with a company.
  6. Duty Of Loyalty

    A director's responsibility to act at all times in the best interests ...

You May Also Like

Related Articles
  1. Investing News

    A New Corporate Governance Initiative ...

  2. Stock Analysis

    Intel Doesn't Need New Management

  3. Stock Analysis

    Will Spinoffs Give American Capital ...

  4. Stock Analysis

    Will American Airlines Fall Back To ...

  5. Stock Analysis

    Qualcomm's New Buyback Program Is Well-Timed

Trading Center