merican Semiconductor, Inc. Essay Sample
American Semiconductor, Inc. is a relatively new business that “provides custom and standard processing services to fabless and IDM companies and researchers.” With the deregulation of certain markets and increasing environmental concerns, the company operates in a rapidly changing business environment. The prospects of American Semiconductor’s products are frequently reviewed, as with any organization, and the company’s strategy is constantly analyzed. Therefore, the business decided to relinquish their debt financing and acquire equity financing; a decision that is not advantageous for a privately owned organization unless the owner wishes to give up total control of the business.
Currency is the necessary means for every person to achieve something new. To begin business, money is required. Financial support is paramount for all types of company expenses such as rent, employee salaries, purchase of new equipment and other parallel expenses. This is often established in all new companies, but the corporations that are previously in existence involve financing to expand the business activities, refurbish the offices or factories or to invest in new profit producing ventures. Most companies can increase funds either by owing money or selling the equity, conditional on a range of criteria.
Debt financing represents any type of borrowing with a guarantee to reimburse the borrowed sum over a particular period of time in addition to interest payments. Accordingly, a company will take out a loan in some type from a lending institution and then the company can use the money on loan for any principle required by the company, and in response the lender will expect the debtor to make the payments along with the interest in a particular period of time.
Furthermore, debt financing means money that anybody owes to someone. The person who lends the money is only concerned about the correct and timely repayment of the debts. Usually this sort of financing occurs with the banks and the small business units. The basic advantages of debt financing are that the owner maintains maximum control over the business and the interest of the debt financing is tax deductible. There are some disadvantages also; too much debt can cause problems if the dependence on such type of financing is more than what is required, allowing a situation to develop where there will be not much revenue left to pay back the loan.
Equity financing refers to the removal of the equity to the investors in return for the financial support. In exchange for the investment the shareholders partake in the management decisions of the company and expect to gain access to all information concerning the performance and activities of the company on a habitual basis.
Equity financing is an “exchange of money for the ownership of the business.” This requires no debt, making this option seem to be the better proposition. The main advantages of equity financing are that there is not much to worry about the repayment of the loan because it is basically related to the profit making capability of the business, as long as there is profit the lenders will be repaid adequately. The connection of investors, because of the equity financing with the business, intensifies the integrity of the company, consequently winning the attention of others in the market. But this method is not without it’s disadvantages because the owner may loose power over the business; because the investors also form an essential part of the business after the equity financing option is in mode. In equity financing when the banker, venture capitalist or any investors are considering giving money to any borrower, then the most important part of it will be the debt equity ratio, by which it can be determined, whether there is adequate money available for repayment in case there is any failure to pay and also reflects the amount of dependents of the business on outer sources.
In summary, deciding the process of financing is not an easy task. A company must give thought on the outlook of the business motives, the amount of control, and the long-term goals. With the equity financing there could be a situation where there may be some disagreement with the owner and the investors and in these circumstances, it is always a better option to give the investors the business, because the selling option of the business is not always advisable. Therefore, if the owner disagrees with the concept of equity financing then it is not the better option rather one should go for the debt financing to keep control over the business.
www.toolkit.cch.com Financial Planning Toolkit. Business Owner’s Toolkit.
www.business.com The Business Search Engine. “American Semiconductor, Inc Profile.”
www.tuff.org The University Financing Foundation. “Debt Financing.”
www.gov.nf.ca Financing Alternatives-Debt vs. Equity.