Corporations may have different cash needs at different points in their life cycle. Two common points at which the need for additional capital often arises is upon formation of the corporation and during later periods of significant expansion. At formation, corporations have no operating cash flow and need capital to begin operations. During expansion, new opportunities and demands require more resources, such as expanded operations that require land and facilities or additional funds for research and product development.
A corporation can acquire capital by direct owner investments of personal funds, by the sale of stock to the general public (equity), or by borrowing debt. The dilemma of choosing the most appropriate funding source is a common one. This decision can involve many factors and is often unique to the industry or the business itself. However, a few of these factors are common to most entities.
Corporations that have access to an equity market may be able to sell ownership shares of the corporation by way of a public stock exchange or via a private market. It may be beneficial to finance the company with the sale of stock if the corporation can generate enough interested investors and meet the desired dollar threshold for investment. One advantage of stock sales is that they do not have to be repaid and carry no direct interest costs associated with borrowing.
If corporations cannot easily generate enough investor interest, they can instead borrow, usually using long-term notes payable or in some cases a bond payable. Though borrowed funds need to be repaid on an ongoing basis, they do have advantages. One such advantage is that financing a company using debt does not change the owner's original share of the company. Another advantage is that the cost of debt financing (interest) is generally deductible for tax purposes.