Should you choose equity or debt capital?
One of the questions that I am often asked by startups and business representatives is the sources of business funding and whether to choose equity or debt capital.
What goals does the company set for itself by raising funds through the issuance of public shares (IPO)?
1. Maximizing the value of shareholders’ shares
2. Attracting money on more favorable terms
3. Awareness raising and more
But in order to reach this stage of financing, you need to go through all the previous stages that correspond to the level of development of the company and the prospects from the market situation, financial stability, solvency, profitability, and so on, as one of the factors for a successful public offering of shares.
The total cost of equity is higher than the cost of debt, and the capital structure in which the cost of capital is the lowest and the cost of the enterprise is the highest is considered optimal.There can be no general recommendations for all enterprises to achieve this optimization. And in conditions of risk and uncertainty, it is obviously impossible to achieve this ideal. A bond loan can be an effective tool for business owners than classic bank loans. In fact, this is a loan, only on more favorable terms. For example, no collateral is needed, the terms of attraction are longer, and under the conditions of changing market interest rates, the issuer can embed an option that will allow managing the placement volume over time.
The issue of bonds helps to attract investors in the long term or simply improve the financial position of the company. However, it should be remembered that by issuing bonds, the issuer is exposed to certain risks associated with deteriorating debt market conditions and, as a result, not attracting the required amount of debt financing. One of the recommendations to reduce the risk is to attract a competent underwriter and choose the right window for placing the issue and forming a pool of interests from debt market participants. According to the Cbonds news agency, as of January 09, 2019, there are 1,398 bond issues in circulation in Russia issued by 405 issuers with a total volume of RUB 11,937.91 billion.