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Generally, financing of corporation is accomplished through a new share issue (equity financing) or the issue of various types of bonds or debentures.
1. Bond financing
Bonds are contractual agreements for a borrowing money secured by a pledge of assets:
a. First Mortgage Bonds: secured by assets such as buildings, land and machinery.
b. Second Mortgage Bonds: security pledged already has been pledged for a prior issue.
c. Collateral Trust Bonds: secured by other securities the company owns.
d. Debentures: bonds secured by the general credit of the organization.
e. Convertible Bonds or Debentures: are issued with warrants.
f. Interest Bonds or Debentures: pays interest only when a profit is earned.
Terms of the bond are also decided by corporation at the time issued.
2. Equity financing
Issues more corporation shares. Capital is usually raised from common shares and after bank interest and dividends to preferred shareholders, the common shareholder shares in a portion of the remaining profits. Of course, the new common shareholder also has a vote and has the right to elect directors. The net profits of a corporation are either paid out as dividends or held as retained earnings and used for reinvestment and expansion.
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