This is part of a series of articles sponsored by NIC bank. NIC will be having a rights issue starting 27th August. Read more about their rights issue here.
That’s a good question. You might as well get a loan and maintain your 100% ownership and control of the company right? Well, there are various reasons why you may want to issue shares (equity financing) rather than source for debt financing.
- From the beginning, it’ll increase your financial base while keeping the opportunity to borrow wide open. You still have the option to explore debt as a source of financing later on without having to pay higher interest rates because of the debt you already have. Also, you do not have to pay for interest. In reality, debt financing increases the risk of the company making it more expensive (higher interest rates for future debt financing) while equity financing is risk-free. And for a start-up, that is critical for the company’s cashflows.
- Because the company is not obliged to pay dividends, it can reduce or not pay dividends at all during tough times. A company cannot be sued for not paying ordinary dividends.
- Unless in very special circumstances, shares are irredeemable. That is, the company cannot buy back its shares from shareholders and therefore the capital, once paid to the company, is secure and the company does not have to worry about shareholders demanding their money back.
- In a trend that is more common nowadays, many companies, especially start-ups, don’t just require cash. They also need support and non-monetary assistance and by issuing equity, the shareholders become active members in the running of the firm through the appointment of directors to the board of directors who in turn hire the chief executive office (or managing director) who runs the company on their behalf.