Sources of Financing a Company - Essay Example

Genesis is a firm that has exhausted its short-term financing options, thus the firm is targeting long-term financial tools. A way for the company to obtain lots of capital to finance its operations is through the sale of common stocks. To legally sell stocks in the stock market companies have to register with the Securities and Exchange Commission (SEC) and issue an initial public offering (IPO). An initial public offering can enable a company to collect large sums of money through the sale of common stocks.

 Common stocks are the most popular investment instrument in the stock market. One of the advantages of common stocks is their liquidity. The second advantage of common stocks is that the payment of dividends is optional (Harris, 2012). A disadvantage of the sale of common stocks is the loss of power because common stockholders have voting rights. The high cost of launching an IPO is another con of common stocks. The use of preferred stocks is another long-term financing option for the company. Preferred stocks offer the advantage of not diluting the power of the owners due to their lack of voting rights. One of the disadvantages of the use of preferred stocks is that preferred stocks have mandatory dividend payments.          

            A third long-term financing option for Genesis is bank loans. A business loan in the United States can be obtained to be financed in ten or more years. The interest rate of a business loan varies depending on the credit score of the business. A con of business loans is that they are a liability that must be paid every month. An increase in liabilities decreases the cash flow of a company. Lenders have cero power or influence over the operating decisions of a company, thus the use of loans does not dilute the power structure of an enterprise. A good thing about bank loans is that they provide companies with large sums of money in exchange for a small monthly payment. A fourth option that Genesis can utilize to obtain financing is the use of corporate bonds. A bond is a debt instrument that pays a coupon interest payment, while the principal is paid once the bond reaches maturity age. Read More