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Information
Venture Capital Funds
Submitted: 2007-01-17 11:50:23
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The principal sources of venture capital funds for a business firm are equity capital, preference capital, debenture capital and term loans. Equity capital represents ownership capital because equity shareholders collectively own the company. They enjoy the rewards, as well as bear the risks of ownership. However, their liability, unlike the liability of the owner in a proprietary firm and the partners in a partnership concern, is limited to their capital contributions. As equity capital funds represent permanent capital, there is no liability for repayment. It enhances the creditworthiness of the company. In general, the larger the equity base, the higher the ability of the company to obtain credit.
Preference capital represents a hybrid form of financing. It partakes of some characteristics of equity and some attributes of debentures. It resembles equity in the way that preference divided is payable only out of distributable profits and is not an obligatory payment. Preference capital is similar to debentures in that the dividend rate on preference dividend is usually fixed and preference stockholders do not normally enjoy the right to vote. When using preference capital funds, there is no legal obligation to pay preference dividend. A company does not face bankruptcy or legal action if it skips preference dividend, and there is no redemption liability in the case of perpetual preference shares.
Akin to promissory notes, debentures are instruments for raising long-term debt capital. Debenture holders are the creditors of the company. The obligation of the company towards its debenture holders is similar to that of a borrower who promises to pay interest and capital at specified times. The specific cost of debt capital, represented by debentures, is much lower than the cost of preference or equity capital. This is because the interest on debentures is tax-deductible, and the effective cost of debentures is much less. Debenture financing does not result in dilution of control since debenture holders are not entitled to vote.
Term loans, also referred to as term finance, represent a source of debt finance that is generally repayable in more than one year but less than 10 years. They are employed to finance acquisition of fixed assets and working capital margin.
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Article source: Expert Articles
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