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In order to operate and develop a company needs capital. Capital is the money that the company uses to run and develop business. There are two main ways in which a company can raise capital, that is find the money it needs: it can use share capital or loan capital, from investors. These are people or organizations who invest in the company; they put money in hoping to make more money.
Share capital is contributed by shareholders who put up money and hold shares in the company. Each share represents ownership of a small proportion of the company. Shareholders receive periodic payments called dividends, usually based on the company’s profit during the relevant period. Capital in the form of shares is also called equity.
Investors can also lend money, but then they do not own a small part of the company. This is loan capital, and an investor or financial institution lending money in this way is a lender. The company borrowing it is the borrower and may refer to the money as borrowing or debt. The total amount of debt that the company has is its indebtedness. The sum of money borrowed is the principal. The company has to pay interest, a percentage of the principal, to the lender, whether it has a profit in the relevant period or not.
Many companies have both loan and share capital. The amount of loan capital that a company has in relation to its share capital is its leverage. Leverage is also called gearing in BrE. A company with a lot of borrowing in relation to its share capital is highly leveraged or highly geared. A company that has difficulty in making payments on its debt is overleveraged.
Assignment to text 2:
1. Look through the text and formulate the main issues of it.
2. Make an outline of the text.
3. What are the main types of corporate finance?
4. Find the sentences which explain the differences between the types of finance.
5. Look through the text once more and enumerate advantages of debt financing. Contrast them to advantages of equity financing.
6. Translate the text.
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