A major part
to start a business or to run a business successfully is finance. The company
must ensure all the time they are in good financial position and can face any
unexpected risks. No doubt there are quite a few finance options available out
there. One needs to choose wisely and calculatedly from among these options
that which one would be better for their organization. Not all of these options
will necessarily be apt for the nature of your business. Let us talk about two
of such finance options. One being ‘shares’ and the other ‘debentures’. What
exactly are these and which one would be more beneficial for you.
SHARES
Basically,
these are a part of the company that can be sold or bought indicating that the
shareholder is the owner of the company up to the amount of his shares. These
are known as the owner’s fund. Often, if the company is in the need of funds
then they tend to sell some of their shares to the prospective buyers.
There are
two types of these shares – ‘equity shares’ and ‘preference shares’. Equity
shares are the shares that do not benefit the owner with any kind of
preferential rights or authorities whereas, preference shares come with its own
benefits.
Some of
these benefits are that preference shareholders have a right to receive a fixed
rate of dividend from the profit before any of the equity shareholders are
declared their dividend. If in case, the profits are not enough to be divided
between both the holders then the equity shareholder will be left with no
dividend. Also, if the company is winding up, preference shareholder’s capital
is returned before the equity shareholders.
One downside
is that preference shareholders do get any say in the management or do not have
any voting rights in the company. This privilege is only provided to the equity
stakeholders.
DEBENTURES
These are
the borrowed funds that are used to raise long-term capital from a source
outside of the company like corporations and governments. Although, there is a
fixed rate of interest that needs to be paid here. The debenture issued is a cognizance
that the company has borrowed funds from the source which it guarantees to
return on a certain date in the future. Therefore, the debenture holders are
known as ‘creditors of the company’.
For the
public issue of debentures, it is mandatory that it has been rated by a credit
rating agency like ‘Credit Rating and Information Services of India Ltd.’
(CRISIL).
SHARES
VS. DEBENTURES
While the
shares are considered to be owner’s funds, the debentures are categorized under
the borrowed funds which means that there is a fixed rate of interest that must
be paid from time to time. Also, if debentures are issued, you don’t get any
rights or benefits from the company whereas, in case of shares, you have a
voting right or you receive a fixed dividend.
The shares
are issued exactly at their face value which means that there won’t be any
discount on the issue which is possible in the case of debentures. Although in
debentures, the company’s assets are to be kept with the source as mortgage
which is not the case in shares.
From a
company’s perspective, if equity shares are issued then it will increase the borrowing
capacity of the company. On the other hand, if debentures are issued, it will
decrease its borrowing capacity.
There isn’t
a right or wrong source of fund out there. It lies in your hands which source
you choose. However, it is a very crucial decision which should be made after
doing the complete research and going through the pros and cons of each one of
them. The decision should be wise and favorable for your company.
