_ DEBT FINANCE: _ EQUITY FINANCE: _ RETAINED
where a company where a company EARNINGS: where a
raises money by raises money by company uses profits
borrowing money issuing shares. This that have not been
from a lender. They can be done in the spent or repaid to
are required to pay following ways: investors of the
this money back company.
later, with interest. ® ORDINARY
® BANK LOANS ® PREFERENCE
® BONDS ® REDEEMABLE
® TRADE ® CONVERTIBLE
CREDITORS SECURITIES
® ASSET AND
TRADE
FINANCING
These can either be
secured or
unsecured.
, TOPIC 8
COMPANY LAW
As well as the above, there are also more non-traditional forms of financing:
4. CROWDFUNDING: where a company raises money by collecting money from
a large number of people on online platforms. This is an innovative way of
raising funds for new projects, businesses and ideas, particularly for startup
companies and growing businesses.
o Crowdfunding works by fundraisers launching an online crowdfunding
platform (a website), where they collect financial pledges. These
platforms will charge fundraisers a fee if the campaign is successful.
P This can be effective because it helps to cultivate an online community,
leading to the company gaining access to new customers.
P Further, crowdfunding platforms are expected to be secure and easy to
use.
P Additionally, these platforms operate an all-or-nothing funding model:
this means that if the fundraiser reaches its target, they obtain all the
money; if they do not, everybody who contributed will get their money
back – this means are no hard feelings nor any financial loss.
o There are three main types of crowdfunding:
1. PEER-TO-PEER LENDING: where the crowd lends money to the company, on
the understanding that the company will repay the money back to them, with
interest.
! This is similar to traditional bank loans; except in this case, the company is
borrowing from investors.
2. EQUITY CROWDFUNDING: where a stake in the business is sold to a
number of investors, in return for their investments.
! This is similar to how stock is bought/sold on a stock exchange.
3. REWARDS-BASED CROWDFUNDING: where individuals donate to a
project / business, with the expectation that they will receive a non-financial
reward in return (e.g. goods or services) at a later stage.
o There are also some minor forms of crowdfunding: donation-based
crowdfunding (individuals donate small amounts to meet the target
of a charitable project, but not receive any financial/material return);
profit-sharing (businesses share future profits with the crowd, in
return for their present funds); debt-securities crowdfunding
(individuals invest in a debt security issued by the company, e.g. a
bond); and hybrid models (businesses combine elements of more
than one crowdfunding type).
â
HOW DO COMPANIES DETERMINE THEIR CORPORATE FINANCING CHOICES?
Corporate financing choices tend to be largely commercial decisions, based on
each individual company.
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