Use of Equity and Debt finance through loans and debentures

 

Every business required finance to carry out its business operations. Finance is the bloodline of organizations. For business corporations finance come in the form of equity or debt. When a business is started, it is done by making an investment which is known as Capital. Equity refers to a share in the share capital of the company. The investor of the company shall keep all the profits with them or shall split it and can share with those who are willing to buy a share in the capital, and a person who buys a share is known as shareholder.

The shareholder will be entitled to net profits of the company after paying taxes and other statutory obligations. They would also have voting rights enabling them to participate in the day to day business operations. Any important business decision cannot be carried out without the approval of the shareholders. They are literally the owners of the company. If majority of the shares say more than half of the total shares are held by an individual or few number of people they control all the decisions in the company.

Whenever the company makes a profit, a part of it goes to the equity and thus increasing the value of individual share and when it makes a loss, it is split and divided equally over the equity leading to decrease in it its value.

Debt funds refer to loans and debentures. Debenture holders are entitled to receive periodical interest payments in return for the funds they have provided to the company. They do not have any voting rights except during meetings related to debentures and debenture holders. Debenture holders are the creditors of the company. They are entitled to receive their interest even if the company is earning profit or not. They enjoy a higher level of security than equity shareholders in terms of receiving their capital back. Debentures can be redeemed after the expiry of a particular period of time beyond which the relationship of the company and debenture holders comes to an end.