Raising Finance for Multinational Enterprise, Collaborative Ventures & Foreign Subsidiaries

Blog 1： Raising Finance for Multinational Enterprises, Collaborative Ventures & Foreign Subsidiaries

Raising money is a important thing for the corporations to support business operations. There are two main methos for current corporations raising finance, such as, equity finance and debt finance. This blogger would analyse and compare both financing method under some specific examples.

1. Definition: Equity Finance & Debt Finance

Equity finance: An efficient way for SMEs to finance high-risk investments because it allows investors to share more fully in the rewards of a successful venture.

Debt finance: When a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise that the principal and interest on the debt will be repaid.

2. Advantages & disadvantages

2.1 Equity finance advantages: 

A. Usually there is no obligation to pay dividens.

B. The capital does not have to be rapaid.

2.2 Equity finance disadvantages:

A. High cost: Equity finance cost of capital would normally higher than debt finance cost of capital. First of all, some extra direct cost would have in equity finance such as advice cost, the legal, accounting and prospectus costs. Secondly, to satisfy shareholder, corporation would have cost on returning. 

B. Loss of control: Under equity finance method, shareholder have some rights to influence corporation decisions.

C. Dividends cannot be used to reduce taxable profit: Dividens are paid out of after-tax earnings, whereas interest payments on loans are tax deductible.

2.3 Debt finance advantages:

Debt financing allows you to have control of your own destiny regarding your business. You do not have investors or partners to answer to and you can make all the decisions. You own all the profit you make.

If you finance your business using debt, the interest you repay on your loan is tax-deductible. This means that it shields part of your business income from taxes and lowers your tax liability every year. Your interest is usually based on the prime interest rate.

The lender(s) from whom you borrow money do not share in your profits. All you have to do is make your loan payments in a timely manner.

You can apply for a Small Business Administration loan that has more favorable terms for small businesses than traditional commercial bank loans.

2.4 Debt finance disadvantages:

The disadvantages of borrowing money for a small business may be great. You may have large loan payments at precisely the time you need funds for start-up costs. If you don't make loan payments on time to credit cards or commercial banks, you can ruin your credit rating and make borrowing in the future difficult or impossible. If you don't make your loan payments on time to family and friends, you can strain those relationships.

3. Comparison with fact examples

(Businessweek, n.d.)

According to Gofunding, the corporations like Neovasc which hold high profitability would prefer choose equity financing to raising money for their business. As a corporation which formed in 2008 (Neovasc, 2012), Neovasc is a newly and small corporation which depends on equity financing in its early stages of development (Gofunding, n.d.).

(Amec, n.d.)

Although, debt financing is usually be used in small pattern corporations, some big corporations could possible using debt financing to raising money in some specific situations. According to BBC (2014), some corporations like Amec would use debt financing to raise funds to fill up the insufficient currency payment. As the characteristics in less risks and transaction fees of debt financing, corporation usually use debt financing in this situation rather than equity financing. Moreover, according to Gofunding (n.d.), the corporations with steady profitability would use debt financing. From above chart, the general stable increasing of Amec shows enough evidence to prove that.

After comparing with two types of financing methods in specific examples, it could be concluded that small and newly corporations with high profitability would prefer equity financing, while stable big corporations prefer debt financing.

Resource related:

Amec.com (n.d.). Amec | financial reports. [online] Retrieved from: http://www.amec.com/media/financial_reports/financial_reports.htm [Accessed: 22 Feb 2014].

BBC News (2014). Amec offers £1.9bn for swiss firm. [online] Retrieved from: http://www.bbc.co.uk/news/business-25711210 [Accessed: 21 Feb 2014].

Businessweek.com (2014). Neovasc inc (nvc:venture): financial statements - businessweek. [online] Retrieved from: http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=NVC:CN [Accessed: 28 Mar 2014].

Go4funding.com (n.d.). Choosing between debt and equity financing. [online] Retrieved from: https://www.go4funding.com/Articles/Small-Business/Choosing-Between-Debt-And-Equity-Financing.aspx [Accessed: 22 Apr 2014].

Marketwire (2014). Neovasc inc. closes c$25 million bought deal equity financing. [online] Retrieved from: http://www.marketwired.com/press-release/neovasc-inc-closes-c25-million-bought-deal-equity-financing-tsx-venture-nvc-1892625.htm [Accessed: 28 Mar 2014].

Neovasc Inc. (2012). Canadian biotech firm specializing in cardiovascular devices. [online] Retrieved from: http://www.neovasc.com/heart-valve-bovine-tissue-tmvi-coronary-sinus-reduction/about-neovasc-canadian-biotech/ [Accessed: 28 Mar 2014].