💰 Corporate Finance: Financing Options
The Money Garden Story 🌱
Imagine you want to grow a beautiful garden. You need seeds, soil, water, and tools. But what if you don’t have enough money to buy everything? You have choices! You could:
- Borrow money from a friend and pay them back next week
- Get a big loan from the bank and pay it back over years
- Find a partner who gives you money and shares your flowers
- Rent the tools instead of buying them
This is exactly what companies do! Let’s explore each way a business can get money to grow.
🎯 The Big Picture
graph TD A["Company Needs Money"] --> B{How Long?} B -->|Less than 1 year| C["Short-Term Financing"] B -->|More than 1 year| D["Long-Term Financing"] D --> E{Ownership or Loan?} E -->|Share Ownership| F["Equity Financing"] E -->|Borrow Money| G["Debt Financing"] D --> H["Lease Financing"]
1️⃣ Short-Term Financing
What Is It?
Short-term financing is like borrowing your friend’s umbrella. You need it now, but you’ll return it soon — usually within one year.
Why Do Companies Use It?
- Pay workers this month
- Buy supplies for a big order
- Cover bills while waiting for customers to pay
Types of Short-Term Financing
📝 Trade Credit
What it is: Buy now, pay later!
Simple Example: A toy store orders 100 teddy bears. The supplier says, “Pay me in 30 days.” The store sells the bears, gets money from customers, then pays the supplier.
Why it’s great: No interest! Free money for a short time.
🏦 Bank Overdraft
What it is: Your bank lets you spend more than you have (up to a limit).
Simple Example: Your business account has $500. You need to pay $800 for supplies. The bank says, “Okay, we’ll cover the extra $300. Pay us back when you can.”
Why it’s great: Super flexible! Use it only when you need it.
💵 Commercial Paper
What it is: Big companies write “I owe you” notes and sell them.
Simple Example: Apple needs $1 million for 60 days. They write a promise: “We’ll pay you $1 million + a little extra in 60 days.” Banks buy these notes.
Why it’s great: Cheaper than bank loans for trusted companies.
🧾 Factoring (Selling Invoices)
What it is: Sell your “customers owe me” papers for instant cash.
Simple Example: A furniture maker is owed $10,000 by a hotel. Instead of waiting 60 days, they sell this invoice to a factoring company for $9,500 today.
Why it’s great: Get cash immediately instead of waiting!
2️⃣ Long-Term Financing
What Is It?
Long-term financing is like getting a loan to buy a house. You’ll pay it back over many years — often 5, 10, or even 30 years!
Why Do Companies Use It?
- Build new factories
- Buy expensive machines
- Expand to new countries
- Launch major projects
Key Difference from Short-Term
| Short-Term | Long-Term |
|---|---|
| < 1 year | > 1 year |
| Small amounts | Large amounts |
| Quick needs | Big investments |
| Easy to get | More paperwork |
3️⃣ Equity Financing
What Is It?
Equity financing means selling a piece of your company to get money. The people who buy these pieces become owners (shareholders).
The Lemonade Stand Story 🍋
You start a lemonade stand. You need $100 for supplies. Your friend says, “I’ll give you $50, but I want half of whatever you earn.”
Now you’re partners. You share:
- ✅ The profits (yay!)
- ✅ The losses (oops!)
- ✅ The decisions (sometimes tricky)
Types of Equity Financing
🎯 Common Stock
What it is: Regular ownership shares.
Simple Example: A company has 100 shares. You buy 10 shares. You now own 10% of the company! If the company makes $1,000 profit, you might get $100.
You get:
- Voting rights (choose company leaders)
- Dividends (share of profits) — but not guaranteed
- Part of the company if it’s sold
👑 Preferred Stock
What it is: Special shares with extra benefits.
Simple Example: Preferred shareholders are like VIP customers. They get:
- First dibs on dividends — paid before common shareholders
- Fixed dividend amount — like getting the same allowance every month
- Less risk — but usually no voting rights
🚀 Venture Capital
What it is: Rich investors fund exciting new companies.
Simple Example: Two college students invent an amazing app. A venture capital firm gives them $5 million. In return, the firm owns 30% of the company.
The deal: High risk, high reward! Most startups fail, but winners can make billions.
Pros and Cons of Equity Financing
| ✅ Pros | ❌ Cons |
|---|---|
| No monthly payments | Share your profits forever |
| No debt to repay | Lose some control |
| Investors bring expertise | Owners may disagree |
4️⃣ Debt Financing
What Is It?
Debt financing means borrowing money and promising to pay it back with interest. You keep 100% ownership!
The Bicycle Story 🚲
You want a $200 bicycle. Your parent says, “I’ll lend you $200, but pay me back $220 over 10 months.”
That extra $20? That’s interest — the cost of borrowing.
Types of Debt Financing
🏦 Bank Loans
What it is: Borrow from a bank, pay back over time.
Simple Example: A bakery needs $50,000 for new ovens. The bank lends the money at 6% interest. The bakery pays $1,000 per month for 5 years.
Secured vs Unsecured:
- Secured: You offer something valuable (like your house) as backup
- Unsecured: No backup needed, but higher interest
📜 Bonds
What it is: Companies borrow from many people at once.
Simple Example: Tesla needs $1 billion. Instead of one big loan, they sell 1 million “bonds” at $1,000 each. Each bond says: “Tesla will pay you back $1,000 + $50 interest in 10 years.”
Who buys bonds?
- Banks
- Pension funds
- Regular people like you!
💳 Debentures
What it is: Bonds without any physical asset backing them.
Simple Example: A tech company issues debentures. Investors trust the company’s reputation — no factory or building is promised as backup.
Risk: If the company fails, debenture holders might lose money.
Pros and Cons of Debt Financing
| ✅ Pros | ❌ Cons |
|---|---|
| Keep full ownership | Must repay even if losing money |
| Interest is tax-deductible | Regular payments required |
| Predictable payments | Too much debt is risky |
5️⃣ Lease Financing
What Is It?
Lease financing means renting instead of buying. The company uses equipment without owning it.
The Car Story 🚗
Your family needs a car. Two options:
- Buy it: Pay $30,000 now, own it forever
- Lease it: Pay $400/month for 3 years, return it after
Leasing is perfect when:
- You don’t have $30,000 upfront
- You want the newest model every few years
- The car might become outdated quickly
Types of Leases
📋 Operating Lease (Short-Term Rental)
What it is: Rent for a short time, return when done.
Simple Example: An event company leases 50 chairs for a wedding. After the event, they return the chairs. No maintenance, no storage problems!
Features:
- Cancelable with notice
- Lessor handles maintenance
- Not shown as debt on company books
📋 Finance Lease (Almost Like Buying)
What it is: Lease for most of the item’s useful life.
Simple Example: An airline leases a plane for 20 years. The plane’s useful life is 25 years. At the end, the airline might buy the plane for $1.
Features:
- Long commitment
- Lessee handles maintenance
- Shown as an asset AND debt on books
Lease vs Buy Decision
graph TD A["Need Equipment?"] --> B{Have Cash?} B -->|No| C["Lease It"] B -->|Yes| D{Technology Changes Fast?} D -->|Yes| C D -->|No| E{Need for Long Time?} E -->|Yes| F["Buy It"] E -->|No| C
🎓 The Complete Picture
Every company mixes these options like ingredients in a recipe:
| Financing Type | Best For | Risk Level |
|---|---|---|
| Short-Term | Daily operations | Low |
| Equity | Big growth, startups | Medium |
| Debt | Predictable investments | Medium-High |
| Lease | Equipment, vehicles | Low-Medium |
🌟 Key Takeaways
- Short-term financing = Quick money, pay back fast (< 1 year)
- Long-term financing = Big money, pay back slowly (> 1 year)
- Equity financing = Share ownership, share profits
- Debt financing = Borrow money, pay interest, keep ownership
- Lease financing = Rent instead of buy, stay flexible
🎯 Remember This Formula
Smart companies use a MIX of financing options!
Too much debt = risky Too much equity = lose control The magic is in the BALANCE ⚖️
💡 Final Thought
Getting money for your business is like building a puzzle. Each piece (short-term, long-term, equity, debt, lease) fits a different need. The best companies pick the right piece for the right situation.
Now you understand how companies fuel their growth! 🚀