Corporate capital occupy a vast importance for modern businesses, there for it is necessary to understand the implications of this powerful financial instrument. Corporate capital is defined as the money that a company obtains from selling its equity such as shares and bonds. This money is not only used to finance the day to day operations of the company but it can also be utilized in order to raise necessary capital from the market.
Corporate capital can be used for various reasons such as to expand the business, for the acquisition of other businesses or for research and development of new products. This money is used to finance activities that would have not been possible without the assistance provided by corporate capital.
When a company is focused on increasing its corporate capital, there are a number of paths that they can take. One of the most common methods to raise corporate capital is through issuing shares or bonds in the market. This process allows the firm to tap into the public markets and capitalize on their own success or potential success.
Corporate capital investments can come in the form of equity or debt. Equity capital is found when existing shareholders invest money into the company or when new shareholders join the company and buy shares into it. Debt capital is when the company borrows money from a lender such as a bank and rewards the lender with fixed interest payments.
When issuing debt capital, the company must also consider that there will be a required loan covenant to abide by as part of the loan agreement. Loan covenants are requirements from the lender and typically require the company to disclose information on a regular basis, to reach specific performance goals or even to establish restrictions on the company’s operations.
Below are some of the advantages and disadvantages of utilizing corporate capital for businesses.
Advantages
a. Increment of visibility. When a company issues shares or bonds in the public market, they are gaining a certain amount of visibility not only within their industry but in the financial markets as well. This increased visibility can be beneficial to attract new investors, customers and employees.
b. Direct access to capital. Corporate capital provides businesses with direct access to capital instead of having to wait for other forms of financing to become available.
c. Increase long-term liquidity. When a company is able to successfully raise corporate capital, it will allow them to further increase their long-term liquidity, a vital component of running a successful business.
Disadvantages
a. Dilution of ownership. Whenever a company issues equity, it will dilute the ownership because it will reduce the portion of the company that each shareholder owns.
b. Issue costs. Issuing shares or bonds will not only mean increased visibility for the company but there will also be associated costs that comes with the process.
c. Potential loss of control. If a company issues too many equity or debt securities, it may result in a loss of control to outside investors, who could potentially interfere with operations and decisions.
As it can be seen, corporate capital can be a powerful financial instrument for businesses if used with caution and all associated risks weighed. Ultimately, corporate capital can be a great way for companies to gain quick access to capital and the ability to finance their operations, acquisitions and research activities.
