The main sources of venture capital funds for commercial companies are equity capital, priority capital, bond capital and term loans. Equity capital represents ownership capital because equity shareholders share the company. They enjoy rewards and bear the risk of ownership. However, unlike proprietary company owners and partnership partners, their responsibilities are limited to their contributions. Since the equity capital fund represents permanent capital, it does not assume repayment obligations. It increases the company's reputation. In general, the greater the equity base, the higher the company's ability to obtain credit.
Preference capital represents a hybrid form of financing. It involves some characteristics of fairness and some attributes of bonds. It is similar to equity because priority splitting can only be paid out of distributable profits, not mandatory payments. Preference capital is similar to bonds because the dividend yield of preferred stock dividends is usually fixed, while preferred stockholders usually do not have voting rights. When using priority capital funds, there is no legal obligation to pay dividends on preferred stock. If the company exceeds the preferred stock dividend, it will not face bankruptcy or legal action, and there is no redemption liability in the case of perpetual preferred stock.
Similar to promissory notes, bonds are a tool for raising long-term debt capital. The holder of the debenture is the creditor of the company. The company's obligations to its holders of debentures are similar to those of borrowers who promise to pay interest and capital at a specific time. The specific cost of debt capital represented by bonds is much lower than the priority or equity capital cost. This is because the interest on bonds is tax-free and the effective cost of bonds is much lower. Since the holder of the debenture has no right to vote, the debt financing will not lead to abuse of control.
Term loans, also known as regular financing, are sources of debt financing and are usually repaid over a year but less than 10 years. They were used to finance the purchase of fixed assets and working capital deposits.
Orignal From: Venture capital fund
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