The perpetuity and success of any business organization are founded on the ability of the entity to acquire sufficient equity to foot its operations. There exist various ways through which an organization can suffice its long-term financial needs. Other than long-term debt, businesses can obtain financing by the following forms that are cheaper than long-term debt. Due to the tightness of business’ liquidity in the present day, businesses have to rely on cheaper sources of financing to ensure their sustainability.
The capital markets also referred to as equity financing forms the cheapest source of funding for business entities in the US. (Palermo, 2014). Companies may venture into the capital markets to raise funds through the issue of new ordinary shares or rights issues to existing shareholders. The existing shareholders are invited by the company to purchase new shares at a reduced share price and in proportion to their existent shareholding. The new ordinary shares can be best used to raise funds for a newly listed company. The common shares usually possess an intrinsic face value and their sale to the investors raises funds for the business and the payment of dividends on such shares is not a priority for the firm, unlike preference shares. ("FAO: Basic Finance for marketers", 2016)
Retained earnings can also serve as another source of business finance cheaper than the debt financing. Retained earnings are a low-cost financing strategy in which the profits are ploughed back into the business instead of paying them out as dividends. ("FAO: Basic Finance for marketers", 2016)
Angel equity is another method through which a company can raise funds less costly than debt financing. The method involves disposing or selling off a portion of its ownership stake to raise cash to boost the business. This strategy can be implemented by disposing of a stake that is not optimally operating or is unprofitable. ("Forbes Welcome", 2016).
References
Forbes. (2016). Forbes.com. Retrieved 30 June 2016, from
http://www.forbes.com/2010/07/06/best-funding-sources-for-small-business- entrepreneurs-finance-dileep-rao.html
FAO: Basic Finance for marketers. (2016). Fao.org. Retrieved 30 June 2016, from
http://www.fao.org/docrep/W4343E/w4343e08.htm
Palermo, E. (2014). Debt vs. Equity Financing: What's the Best Choice for Your Business?.
Business News Daily. Retrieved 30 June 2016, from http://www.businessnewsdaily.com/6363-debt-vs-equity-financing.html
