Every successful businessman always wants to develop further their business. The owner of the business will set up plenty of strategies to expand their business. Should the business growth is marked by the expansion of the market shares; there are two normal ways to achieve this goal. First, the business owner may acquire the competitor markets, and second, the business owner may explore the new potential market. However, along with the business growth the owner may also encounter many problems. One of these problems is the strategy to finance the development of the business. In a simple thinking, there are two ways to finance the business growth, i.e. first stem from the debt and second comes from the additional equity.
There are two ways to raise the funding through debt. First, the owner can apply for loan facility at a bank. To get the approval from the bank for the loan facility, the owner has to disclose all information and provide the real financial data to underpin the loan proposal. It is suggested to the business owner to honestly disclose the situation and condition of her company. If the owner does not get the approval for the loan application, the owner will likely get the alternative solution from the bank officers to fill the financing gaps which are a difference between holding period and collection period. In fact, loan facility is not always the proper medicine to cure the problem of financing gap.
Moreover, prior to applying loan facility, the owner has to consider whether the additional incomes meet the additional costs which stem from the application fee, interest costs, installment, etc. Second, the owner can issue bond in the debt market to raise the funds. The process to issue bond is entirely different from applying the loan facility to the bank, yet it will not be discussed further on it. As the investor who wants to buy the bond, she should know the different between yield and price of bond. Yield and price has an opposite correlation because when yield rise, the bond price decreases.
Alternative way to raise funding can be either through issuing shares or crowdfunding. Unlike the bond, issuing shares implies that let other people to own our company. The shareholder who has the biggest portion of shares can fully control the company. There are two kinds of shares, i.e. ordinary shares and preference shares. Both shares have an authority to control the company; nevertheless the preference shares have first rights for the payment of dividends. Normally, the shareholder and business manager are different people.
The shareholder owns the company, whilst the business manager is the person who runs the company. Therefore it will arise a conflict of interest between shareholder and business manager, it is known as the agency problem. On the other hand, the crowdfunding is more complicated to be understood. The equity-based crowdfunding cannot be traded after being bought. The investors can sell their when the company bought by another party or the share issued to another party.
The investors may gain capital gain after selling the company to other party. Aside from equity-based crowdfunding, the business owner can get additional equity from business angels or venture capital. Business angels can offer both equity funding and management skills. Venture capital is the group of people who are willing to invest to early-stage company that is characterized by high growth and high risk business.
To sum up, there are two ways for growing company to raise funding. First, the company can obtain funding through debt instruments such as loan facility provided by bank or issuing bond. Second, the company can offer the shares to external investors. The second way may arise an agency problem because the business owner and business manager are different people. A business owner should decide properly the best instrument to raise funding because each instrument has different impact to the financial performance and ownership of the company.