Finance and Investment

To be successful, companies and corporations need access to capital (money). There are two types of finance available to companies: debt finance and equity finance.

Debt Finance is when a company owes money. This finance has the advantage of the interest being tax allowable but has to be repaid, whatever the circumstances. There are two types of debt finance: loans and bonds.

Equity Finance is when others invest in a business and, in return, have part ownership in the business and share in its success. There are two types of equity funding: shares and venture capital.

Follow the story of our imaginary company, Butlers, to find out more about how banks provide the finance for companies to grow and expand through debt and equity finance.

 
Loans - Borrowing to finance requirements
A loan is an agreement for a temporary transfer of money from its owner (the lender) to a borrower who promises to return it according to the terms of the agreement, usually with interest as payment for its use.
Find out what happens when Butlers, a private limited company, approaches the bank for a loan.
 
Shares - Part ownership in a company
A share is a unit of ownership in a company. Each share entitles the holder to an equal portion of any profits declared in the form of dividends. Shareholders don't have direct control over the day-to-day operation of the business but they must be informed about any radical changes.
Find out what happens when Butlers floats on the stock exchange and sells shares in the company to the public for the first time.
 
Bonds - The issuing of IOUs
A bond is basically an IOU issued by a company as a formal contract, promising to repay the lender the bond's value (known as the principal) at maturity. This can be anything from a few days to 20 or more years. Interest (known as the coupon rate) is paid to the bondholder at fixed intervals.
Find out how Butlers finances a large new project with a bond issue.
  
Venture Capital - Capital for high risk companies
Venture capital is money that is invested in young or expanding companies to help them grow rapidly and become profitable; these companies are high risk and often fail. Venture capital is usually invested as shares (private equity), by specialist companies.
Find out what happens when one of Butlers' specialist suppliers applies for venture capital.


Loans cannot usually be traded, however bonds and shares can. Bonds and shares are known collectively as securities. The initial issue of bonds and shares, to the public, is known as the primary market.  People who purchase (invest in) these securities do not have to keep them but can trade them on the financial markets (known as the secondary market) along with other financial assets. For more information see the section on trading.