Private Debt Financing: Exceptional Service Grading Company's Options - Essay Sample

Introduction

Private debt financing involves the lending of funds to the business organization by other entities apart from banks. Peer to peer lending is conventional in private funding (Habib, Ranasinghe & Huang, 2018). However, the loan can also be done by more specialized entities like insurance companies that operate in various segments of the economy. These debts are also not available for trading in open markets.

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The Exceptional Service Grading Company can utilize the funds to meet the ongoing operations or to improve the company infrastructure. The funds do not seek to own any part of the business, unlike equity (Habib, Ranasinghe & Huang, 2018). However, the company has to pay the full amount plus the interest rate for the loan. The loan is expensive due to high-interest rates. The company should apply this approach if the project it wants to undertake is highly profitable, and there is no cheaper source of capital. Private debt financing would not claim shares or ownership of the company. The current shareholders retain the power to control the firm.

Private Transfer of Partial Ownership

Private transfer of partial ownership to the company involves selling the company partially. This way, the Exceptional Service Grading Company can minimize personal financial risks and maintain ownership control of the organization at the same time. The main advantage of this kind of arrangement is the fact that the initial business owner will have additional capital for growth in other to remain in control of the company (Habib, Ranasinghe & Huang, 2018). The revenue and profit for the organization are likely to grow. Apart from increasing revenue and benefits, the partial sale arrangement is advantageous in that it can help reduce unprofitable expenditures and enhance business growth. Selling the company would quickly raise the required amount, but the control would be compromised. The new shareholder must be accommodated in all decision-making strategies of the firm.

Private Transfer of Entire Ownership

A buyout mainly occurs when a buyer acquires over 50% of the firm. A buyout can also be outright purchase, where the buyer purchases 100% shares of the company (Habib, Ranasinghe & Huang, 2018). The situation result to complete change of control of the company. The buyer also acquires all the company debts in this case. Buyouts would result inefficient in case of product duplication in the market (Habib, Ranasinghe & Huang, 2018). It also reduces unnecessary competition in the market. However, it can lead to increase in debt by the acquiring firm. The Exceptional Service Grading Company would transfer all the obligations to the buyers because the shareholders would leave the company. The buyout would only apply to this company want to exit the market. The company would quickly raise funds because it can be sold to a more prominent firm. However, it would lose all the current shareholders. The management would also change as another company would acquire it. The method should be the last option in case the company fails in its operations

Corporate Bonds

A corporate bond is issued by a corporation and sold to any investors. The company assets are used as collateral for the loan. The payment ability of the investor creates the loan backing. The bond has a higher risk, hence, higher interest rates. This method is preferable when the company has a large asset base. Corporate bond does not affect the control of the company as it remains with the current shareholders (Muscat, 2016). More so, the Exceptional Service Grading Company management would be more keen to avoid failing to pay the debt and lose the company. Hence, they would strive so much to ensure the profitability index of the firm is high. However, the cost of debt is high and expensive for the company. More so, it puts the assets of the business at risk. The source would raise a limited amount of funds as the lender would consider the ability of the firm to pay.

Public Equity Offering

A public equity offering refers to the sale of equity shares to the public as a way of raising capital. The funds can be utilized by Exceptional Service Grading Company to finance the operations of the business. It can also be used to fund the activities of the company. The securities, in this case, have to be listed in the stock exchange (Muscat, 2016). Public equity offering would make one way of raising capital for The Exceptional Service Grading Company. But, the company has to meet all requirements and follow necessary procedures to change from private company to public limited company. This technique can quickly raise the required amount because it will target many investors. However, the current shareholders probably lose some power because the decision making would be long and would require more stakeholders. Also, the double taxation rule would apply as company changes from private to public.

References

Habib, A., Ranasinghe, D., & Huang, H. J. (2018). A literature survey of financial reporting in private firms. Research in Accounting Regulation, 30(1), 31-37. Retrieved from https://www.sciencedirect.com/science/article/abs/pii/S1052045718300055

Muscat, A. (2016). The liability of the holding company for the debts of its insolvent subsidiaries. Routledge. Retrieved from https://www.routledge.com/The-Liability-of-the-Holding-Company-for-the-Debts-of-its-Insolvent-Subsidiaries/Muscat/p/book/9781138276789