Discuss the main sources of funds that are available to a major international business in order for it to grow, and note the advantages and disadvantages in each. If you were a manager in such a business, what would you expect the relationship manager from your main bank lender (alone or in a consortium) to be requiring of you, and offering to you? To begin with, Cavusgil, Knight, Riesenberger, Rammal, and Freeman (2011) say that equity financing is one of the financial sources for a business that intends to engage in international operations.
When firms use equity financing, it gets capital through sale of shares. With the money that the business gets from equity financing, the shareholders get a percentage of the ownership interests in the business. This source of fund for global operations also refers to share capital. Equity finance is in various forms, and that business angels and venture capitalists provide it to the business that need it (Çetindamar 2003). Besides, the investment of equity finance happens with a supposition that there might be a long or medium term profits. Moreover, equity finance where the project’s nature bars debt providers like banks.
It is also suitable where a firm has insufficient money to recompense loan interest since it is necessary for the main activities or funding development. Some of the equity finance sources include business finance, business angels, venture capital, enterprise fund capital, and Enterprise Investment Scheme (EIS). Equity finance is disadvantageous, as it requires the business owner and the fund source to share company shares (Landström 2009; Besley 2012). Notably, international equity market is a global market of finances for equity funding; the stock exchange all over the world where firms and investors meet to sell and buy shares (Cavusgil, Knight, Riesenberger, Rammal, & Freeman 2011).
Cavusgil, Knight, Riesenberger, Rammal, and Freeman (2011) say that another source of funds for global operations involves debt-finance. This entails a source of finance entails borrowing money from an external source with a promise to bring back the principal, and the consented-upon interest level. This source of money has an equal share of advantages as well as disadvantages. To start with, debt financing is advantageous in that it maintains ownership of the business, tax deductions, and low interest rates.
On the other hand, debt financing has drawbacks including high rates, requirement of a collateral and cash, affects business’s credit rating, and repayment possibility in case of bankruptcy. There are two major sources of debt financing include bond sales and loans. The third of source of finances for international operations entails intra-corporate financing. These funds are from firm’s internal network of affiliates and subsidiaries. This involves funds obtained from internal sources the firm in terms of loans, equity, and trade credits.
Trade credits come from when a vendor of services and goods gives the clients an alternative to recompense later. Some of the advantages of this source are that interest payments are tax deductible; it has a reduced income tax burden; little impact on parent’s balance sheet; can save transaction costs; and prevents the ownership-diluting impact of equity financing (Cavusgil, Knight, Riesenberger, Rammal, and Freeman 2011; FAO 2012; Kurtz 2011).