TOPIC 8
COMPANY LAW
8. CORPORATE FINANCE (DEBT, EQUITY CAPITAL & LEGAL CAPITAL):
#1. DEBT & EQUITY CAPITAL:
1. INTRODUCTION TO CORPORATE FINANCE:
WHY DO COMPANIES NEED FINANCE?
A company may need money for a variety of reasons:
® They may need capital in order to pay their suppliers, employees’ wages
or outstanding bills.
® They may need funds for a particular project or transaction.
® They may need a one-off sum to resolve a financial crisis.
SOURCES OF FINANCING:
How do companies obtain this money?
Most companies raise finance through a combination of debt finance and equity
finance (traditional forms of financing).
1. DEBT FINANCE: 2. EQUITY FINANCE: 3. RETAINED
EARNINGS:
_ 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).
HOW DO COMPANIES DETERMINE THEIR CORPORATE FINANCING CHOICES?
Corporate financing choices tend to be largely commercial decisions, based on
each individual company.
, TOPIC 8
COMPANY LAW
However, other considerations may also be relevant (e.g. economic and legal
matters).
2. DEBT FINANCE:
Ò DEBT FINANCE: where a company raises money by borrowing from a lender,
who expects the money to be repaid with interest at a later date.
The appropriate method of debt finance (from the types below) will depend on
the size and creditworthiness of the borrower (the company).
Debt finance can be divided in two main types: ISSUING DEBT SECURITIES
and BANK LOANS.
A. ISSUING DEBT SECURITIES (LOAN CAPITAL):
WHAT IS DEBT SECURITY?
Ò DEBT SECURITY: a financial instrument. The company will issue the debt
security; they will promise to repay investors the amount they borrowed on /
by a specified date (on this date, the debt security is said to ‘mature’), with
interest.
These can be easily traded between investors, making them attractive to
investors.
! Note that CA 2006 uses the more old-fashioned term ‘debentures’, instead of debt
securities. In practice, ‘debenture’ refers to the security agreement which secures
the debt (secured loans).
WHAT ARE THE DIFFERENT FORMS OF DEBT SECURITY?
Debt securities take a variety of forms:
® BONDS: these have a maturity of 1 year or more.
® MEDIUM TERM NOTES: these are issued under medium term note
programmes and tend to have a maturity of up to 30 years.
® COMMERCIAL PAPER: these have a maturity of less than one year.
WHAT ARE THE PROS OF DEBT SECURITIES?
ADVANTAGES OF DEBT SECURITIES (& CONSEQUENT
DISADVANTAGES OF BANK LOANS):
ACCESS TO BROADER GROUP OF INVESTORS: if a company chooses to
COMPANY LAW
8. CORPORATE FINANCE (DEBT, EQUITY CAPITAL & LEGAL CAPITAL):
#1. DEBT & EQUITY CAPITAL:
1. INTRODUCTION TO CORPORATE FINANCE:
WHY DO COMPANIES NEED FINANCE?
A company may need money for a variety of reasons:
® They may need capital in order to pay their suppliers, employees’ wages
or outstanding bills.
® They may need funds for a particular project or transaction.
® They may need a one-off sum to resolve a financial crisis.
SOURCES OF FINANCING:
How do companies obtain this money?
Most companies raise finance through a combination of debt finance and equity
finance (traditional forms of financing).
1. DEBT FINANCE: 2. EQUITY FINANCE: 3. RETAINED
EARNINGS:
_ 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).
HOW DO COMPANIES DETERMINE THEIR CORPORATE FINANCING CHOICES?
Corporate financing choices tend to be largely commercial decisions, based on
each individual company.
, TOPIC 8
COMPANY LAW
However, other considerations may also be relevant (e.g. economic and legal
matters).
2. DEBT FINANCE:
Ò DEBT FINANCE: where a company raises money by borrowing from a lender,
who expects the money to be repaid with interest at a later date.
The appropriate method of debt finance (from the types below) will depend on
the size and creditworthiness of the borrower (the company).
Debt finance can be divided in two main types: ISSUING DEBT SECURITIES
and BANK LOANS.
A. ISSUING DEBT SECURITIES (LOAN CAPITAL):
WHAT IS DEBT SECURITY?
Ò DEBT SECURITY: a financial instrument. The company will issue the debt
security; they will promise to repay investors the amount they borrowed on /
by a specified date (on this date, the debt security is said to ‘mature’), with
interest.
These can be easily traded between investors, making them attractive to
investors.
! Note that CA 2006 uses the more old-fashioned term ‘debentures’, instead of debt
securities. In practice, ‘debenture’ refers to the security agreement which secures
the debt (secured loans).
WHAT ARE THE DIFFERENT FORMS OF DEBT SECURITY?
Debt securities take a variety of forms:
® BONDS: these have a maturity of 1 year or more.
® MEDIUM TERM NOTES: these are issued under medium term note
programmes and tend to have a maturity of up to 30 years.
® COMMERCIAL PAPER: these have a maturity of less than one year.
WHAT ARE THE PROS OF DEBT SECURITIES?
ADVANTAGES OF DEBT SECURITIES (& CONSEQUENT
DISADVANTAGES OF BANK LOANS):
ACCESS TO BROADER GROUP OF INVESTORS: if a company chooses to
