Funding has become a major problem for most firms in terms of funding their day-to-day activities and operation. Various costs need to be covered, such as equipment, stock and paying bills. In view of this, corporations often need to raise funds, or capital, to expand their businesses. However, companies do aim to use the profits from ongoing business operations to fund such projects, and at times seek funds from external sources like lenders.
Notwithstanding all the discrepancies among the thousands of companies in the world and various industry sectors, there are only a few sources of funds available to all firms. Sources of funding available for firms include Retained earnings, Debt and Equity. In the corporate finance decision process, internally generated cash flow is the preferred and dominant source of funds for long-term finance. This cash can come from current operations or could have been accumulated over time.
Firms raise funds because of a short-term need to pay bills, or have a long-term goal and require funds to invest in their growth. By selling shares, a firm is essentially selling ownership in their firm in return for cash. There are many sources which Equity financing comes through.
Equity to Debt financing: The most common form of financing is through Debt financing. Debt financing is however the borrowing of money and paying it back with interest, which sometimes comes with restrictions on a firm’s activities that may prevent it from better opportunities outside the scope of its core mandate. Creditors look at low debt-to-equity ratio, which benefits the firm in case it needs to access additional debt financing in future. Debt financing is easier because loan payments do not fluctuate, since it is very simple to forecast expenses. When payment of loans has been fulfilled, the lender has no further control over the firm; your relationship with the financier is over and the interest you pay is tax-deductible.
Initial Public Offering (IPO)
Initial public offering (IPO) is one of the methods that companies use to go public, by making its stock available to retail traders and investors. Companies offer shares, and they decide how many shares they want to offer to the public for an investment bank to suggest an initial price.
Companies that go public with IPOs get a lot of publicity and media coverage. The regular audit and financial statement scrutiny that companies must undergo on a regular basis helps customers have a better perception of companies. Finally, publicly traded companies often have more impact when it comes to negotiating with vendors. The graph below shows some of the listed companies in the Finance Sector according to the Ghana Stock Exchange (GSE).
Sources: Ghana Stock Exchange (GSE)
Methods by which companies can raise equity finance through an IPO are included below.
Offer for subscription
This is where the public subscribes to new shares in a company by invitation, which might involve existing shareholders selling some of their shares to the public.
There is always a minimum level of total subscriptions for the shares. The offer can be withdrawn if this amount is not met by shareholders collectively. On the other hand, if a company accepts more applications for shares than are on offer, it can reduce the number of shares it allocates to each applicant accordingly. If a company that has shares announces an offer for subscription, then a secure message is sent. This will explain the terms of the offer, the costs involved, and how to confirm your chosen option. If the offer is unsuccessful due to not being able to get enough investors to subscribe, it will be a waste of time and resources.
Offer for Sale
Offer for sale is where new shares are advertised by a company for sale to the public as a way of launching itself on the Stock Exchange. Companies already listed on the stock exchange conduct Offers for sale. There are two main ways Offers for sale are organised. Offer for Sale by Fixed Price and Offer for Sale by Tender.
Offer for Sale by Fixed Price is where a sponsor fixes the price prior to the offer, and the fixed price is usually set at a premium above the market price.
Offer for Sale by Tender, on the other hand, is the process whereby an open offer or invitation is sent to all stockholders of a publicly traded corporation to buy shares of a company. However, prices are stated by investors, and they confirm what they willing to pay. Because of that, a strike price is determined by the sponsors after receiving bids.
Shareholders identify the minimum price (floor price) at which they intend to sell the shares. Thus, the strike price should always be higher than the floor price. However, prospective investor who wishes to bid for the offer should quote a higher price than the market price at which a share is tradable to make an attractive offer. Offering a higher bid is often characterised by the intention of acquiring a controlling stake in the respective company.
Conditions under Offer of sales includes Shareholders who intend to promote an offer for sale, and they should hold at least 10% of share capital. Shareholders should not have purchased and/or sold shares of the company in the 12 weeks period prior to the offer. Shareholders should not undertake to purchase and/or sell shares of the company in the 12 weeks period after the offer.
Placing
A placing is another method by which IPOs are issued to specific investor, usually institutions. Companies are listed publicly to raise money by issuing more shares. Unlike a rights issue that is available to all existing shareholders, a placing of shares is made to any range of suitable buyers who can be found. Placing can still be biased to existing shareholders if they are excluded, and new investors can rather buy shares at a discount market price.
In conclusion
Too much debt can affect the profitability and balance of a business, making it difficult to get a proper balance over time. When choosing a loan, it is wise to consider carefully how much is needed to support your goals and to borrow only what you need. This may prevent you from having serious issues along the way. Hence, it is important to be listed to raise funds to finance your company.
Justice is a Banker with strong knowledge of Clients and E-banking services. He is a researcher. Contact: [email protected] Cell: +233 24 519 2745.
