• Businesses need external financing to operate and grow.money image by Andrzej Włodarczyk from Fotolia.com
  
  Commercial entities and governments need external financing to fund operating needs, short- and long-run initiatives, expansion projects and working capital constraints. They also may need cash for merger or acquisition programs and investment strategies. Corporate finance specialists and investment bankers help entities evaluate capital structure models and select adequate funding tactics.
  
  

Bank Loans

• Entities may raise funds by applying for bank term loans, revolving credit lines or overdraft agreements. Term loans are for fixed periods. Entities borrowing from revolving lines of credit are allowed to use loan proceeds again as long as they make minimum payments. Entities pay lenders fixed or variable amounts on a periodic basis.
  
  

Equity Issuance

• Entities may seek external financing by selling equity shares on securities exchanges. Buyers of equity shares--also called shareholders or stockholders--acquire voting rights and are paid dividends periodically. They also make profits when stock prices increase. Entities non-listed in securities may sell equity shares privately to investors such as banks, insurance companies, asset management firms and brokerage institutions. Corporate finance experts and investment banks help sell such securities in private placements.
  
  

Government Subsidies

• Governments encourage entities to invest in designated programs such as economically disadvantaged areas or industry sectors. They provide subsidies, grants or tax advantages to entities that meet program guidelines and procedures. For example, a Delaware-based medium-size company investing in green energy might get an environmental tax reduction from the U.S. federal government. Similarly, a pharmaceutical company building plants and hiring local workers in an economically deprived zone might get public subsidies.
  
  

Bonds

• Firms also may finance short- or long-run initiatives by selling bonds--or debentures--to investors on securities exchanges. Non-listed entities may sell such products privately to interested investors such as insurance companies, pension funds and banks. Bondholders receive periodic interest payments.
  
  

Quasi-debt

• Quasi-debt financing involves issuing equity-debt securities. Such securities are also referred to as hybrid securities. Convertible bonds and preferred stocks are examples of quasi-debt instruments. Convertible bondholders receive periodic interests and principal loan amounts at maturity--similarly to regular bondholders. They also have rights to convert bonds into stocks in accordance with bond issuance agreements. Preferred shareholders receive periodic dividends before regular--or common--shareholders. For example, Company XYZ wants to distribute $1 million in dividends but has $1 million in preferred dividend obligations and $3 million common dividends due. Preferred claims will take precedence over regular claims; thus, preferred shareholders will receive $1 million and no common dividends will be distributed.