BLP WS 10 & 11
Company Finance
Raising finance: Debt vs equity finance
A company can raise finance in two main ways:
Equity Finance (i.e. issuing shares to new members)
Debt Finance (i.e. borrowing)
The boxes shaded indicate which of the options is more advantageous in a particular category.
From the Lender/Investor’s/Shareholder’s Point of View
Reason Equity (Shares) Debt (Loans)
Dividends/ The company normally has discretion over Interest payments must be paid when they
interest - dividend payments. become due.
income The investor is not guaranteed payment. The lender may be able to petition to wind up the
company if it is unable to pay its debts when they
fall due.
Alternatively, may be able to enforce security.
Capital value May increase or decrease depending on the Will remain constant
of the company’s fortunes
investment
Repayment of Will not be repaid unless the company is Capital will be repaid or else borrower will
capital wound up, though shareholder can sell his default on the loan and the lender can enforce
shares to a third-party investor. security.
Can recoup capital by selling shares to 3rd
party – hard to find for small companies
Restrictions Can be sold though may be restricted by the Nothing to stop a lender transferring the loan
on sale articles agreement to a third party
Model Article 26(5) gives directors discretion
to refuse to register a new shareholder
Influencing Investor will be able to attend GM’s and is Save for the imposition of covenants in the loan
company likely to get voting rights so will be able to agreement, the lender will be unable to influence
decisions influence company decisions – depends on company decisions.
size of holding
Risk Riskier than providing a loan. Cannot take Can spread the risk:
security, and if the company becomes o Syndicated loans
insolvent creditors will be paid before o Security
shareholders. May get nothing back. o Can seek guarantees from directors.
Buying shares is more risky Lender is much more likely to get repaid if the
A company in financial difficulty will not issue company goes insolvent.
a dividend as no distributable profit exists Interest payments
Payment of dividends is usually discretionary
(but depends on type of share)
If company is insolvent, capital value of
shares is 0
1
, BLP WS 10 & 11
From the Company’s Point of View
Reason Equity (Shares) Debt (Loans)
Dividends/ The company normally has control over Interest payments must be paid when they
interest dividend payments; it can choose not to pay become due
them if the company is struggling If the company has insufficient funds it may have
financially to sell assets to meet the payments
Failure to pay interest on time is likely to be an
event of default
Repayment of Generally not repayable unless the Repayable in full at a future date
capital company is wound up If company doesn’t pay then it will be in default
Tax Dividend payments are NOT tax deductible Interest is normally a trading expense which can
expenses for the company be deducted to reduce the company’s tax liability
Investor Likely to have influence over the way in No influence over the way the company is run
involvement which it is run e.g. he may have voting rights save for imposing covenants in the loan
agreement
Cost Dilution of existing shareholdings. May raise Dependent on economic circumstances e.g. if
control issues. interest rates are low can be relatively cheap.
Availability Always available though for small limited Dependent upon economic circumstances. When
companies it may be difficult to attract new times are tough banks will be less willing to lend
investors However where interest rates are low debt
finance can be comparatively cheap
Gearing Increased shareholder investment will If the company has a lot of debt in comparison to
improve a company’s proportion of debts shareholder funds it may only be able to obtain
to shareholder funds finance through equity finance
Restrictions on Issuing of new shares is subject to Obtaining loans may be subject to restrictions in
ability to raise procedural restrictions in the Companies Act the company’s articles or existing loan
finance 2006. Loans are far less regulated. agreements.
Shares overview
2
Company Finance
Raising finance: Debt vs equity finance
A company can raise finance in two main ways:
Equity Finance (i.e. issuing shares to new members)
Debt Finance (i.e. borrowing)
The boxes shaded indicate which of the options is more advantageous in a particular category.
From the Lender/Investor’s/Shareholder’s Point of View
Reason Equity (Shares) Debt (Loans)
Dividends/ The company normally has discretion over Interest payments must be paid when they
interest - dividend payments. become due.
income The investor is not guaranteed payment. The lender may be able to petition to wind up the
company if it is unable to pay its debts when they
fall due.
Alternatively, may be able to enforce security.
Capital value May increase or decrease depending on the Will remain constant
of the company’s fortunes
investment
Repayment of Will not be repaid unless the company is Capital will be repaid or else borrower will
capital wound up, though shareholder can sell his default on the loan and the lender can enforce
shares to a third-party investor. security.
Can recoup capital by selling shares to 3rd
party – hard to find for small companies
Restrictions Can be sold though may be restricted by the Nothing to stop a lender transferring the loan
on sale articles agreement to a third party
Model Article 26(5) gives directors discretion
to refuse to register a new shareholder
Influencing Investor will be able to attend GM’s and is Save for the imposition of covenants in the loan
company likely to get voting rights so will be able to agreement, the lender will be unable to influence
decisions influence company decisions – depends on company decisions.
size of holding
Risk Riskier than providing a loan. Cannot take Can spread the risk:
security, and if the company becomes o Syndicated loans
insolvent creditors will be paid before o Security
shareholders. May get nothing back. o Can seek guarantees from directors.
Buying shares is more risky Lender is much more likely to get repaid if the
A company in financial difficulty will not issue company goes insolvent.
a dividend as no distributable profit exists Interest payments
Payment of dividends is usually discretionary
(but depends on type of share)
If company is insolvent, capital value of
shares is 0
1
, BLP WS 10 & 11
From the Company’s Point of View
Reason Equity (Shares) Debt (Loans)
Dividends/ The company normally has control over Interest payments must be paid when they
interest dividend payments; it can choose not to pay become due
them if the company is struggling If the company has insufficient funds it may have
financially to sell assets to meet the payments
Failure to pay interest on time is likely to be an
event of default
Repayment of Generally not repayable unless the Repayable in full at a future date
capital company is wound up If company doesn’t pay then it will be in default
Tax Dividend payments are NOT tax deductible Interest is normally a trading expense which can
expenses for the company be deducted to reduce the company’s tax liability
Investor Likely to have influence over the way in No influence over the way the company is run
involvement which it is run e.g. he may have voting rights save for imposing covenants in the loan
agreement
Cost Dilution of existing shareholdings. May raise Dependent on economic circumstances e.g. if
control issues. interest rates are low can be relatively cheap.
Availability Always available though for small limited Dependent upon economic circumstances. When
companies it may be difficult to attract new times are tough banks will be less willing to lend
investors However where interest rates are low debt
finance can be comparatively cheap
Gearing Increased shareholder investment will If the company has a lot of debt in comparison to
improve a company’s proportion of debts shareholder funds it may only be able to obtain
to shareholder funds finance through equity finance
Restrictions on Issuing of new shares is subject to Obtaining loans may be subject to restrictions in
ability to raise procedural restrictions in the Companies Act the company’s articles or existing loan
finance 2006. Loans are far less regulated. agreements.
Shares overview
2
