Financing is an integral part of any business to fuel future growth plans.
Corporations and small companies can use different channels to source funds to support their business activities – including operational and investment undertakings.
Business funding is categorised into three main areas – retained earnings, debt capital and equity capital.
Retained earnings are the most basic source of funding for any company.
After generating profits, a company can decide to distribute it to shareholders in the form of dividends, or alternatively the company can invest those proceeds into a new project, business expansion or partnering with other companies to create joint ventures.
Company owners can obtain debt financing privately through borrowing from friends and relatives, private investors or banks, or they can raise funds by issuing corporate bonds to the public.
This type of capital requires the company to pay periodic interest and/or principal until it is paid off.
It is also costly and can be a burden for the company, and in some cases it requires collateral to secure the borrowing proceeds.
As the company grows bigger, the demand for capital also increases beyond the limit of the aforementioned source of funding.
Though it can be perceived as a risky way for a company to get funding due to the periodic interest-payment obligation, it can also be seen as a wise choice for the owner to get access to money while retaining total control over the company.
Equity funding does not require making interest and/or principal payments to the lender, unlike debt financing.
Companies satisfying the listing requirements of the bourse are able to go public or carry out an initial public offering (IPO) by issuing shares and allowing public investors to become shareholders in the company by purchasing shares.
The special feature of raising funds through an IPO is that the company can raise capital in large amounts several times based on the potential of the company to expand its business or implement large, long term projects.
In this corporate exercise, the company is not required to pay interest or repay the principal to the investors but shall distribute dividends to the investors instead.
However, the company may decide not to distribute the dividends and reinvest the profits in the company to further expand its business.
By raising capital through the stock market, companies can enjoy continuous sources of low-cost financing while benefiting from tax incentives of up to 50 per cent on corporate tax depending on the size of the IPO.
In addition, an IPO exercise helps the privately held company in improving its reputation, strengthening its corporate structure, attracting potential strategic partners and developing competent human resources, as well as in gaining greater public trust – which all help contribute to business growth.
Going IPO is a wise option to expand a business quickly rather than depend on the accumulation of annual profits to develop the company.
It gives the opportunity for new companies to seize potential market share, while not doing so is likely to cause a company to lose potential market share and suffer stifled growth through a loss of competitiveness.
The Cambodia Securities Exchange is a source of financing that allows companies to raise capital to support the growth of local businesses as well as increase people’s incomes and contribute to national economic development.
Contributed by: The Cambodia Securities Exchange, Listing and Disclosure Department
Email: [email protected]
Tel: 023 95 88 88/ 023 95 88 85
Disclaimer: This article has been compiled solely for informative and educational purposes. It is not intended to offer any recommendations or act as investment advice. The Cambodia Securities Exchange is not liable for any losses or damages caused by using it in such a way.