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Lessons - Issues and Practical Considerations in Equity Financing in Nigeria

Posted By: Admin | 11.September.2018 |
Profit making is the primary goal of business howsoever organised - whether a partnership, private or public (listed or unlisted) company, and this is duly recognised by law. One universally acknowledged way of increasing the prospects and quantum of profit is through growth and expansion. It is difficult (but not impossible) to increase profit without achieving growth. Often times (and all things being equal), size translates to profits because of bigger scale, larger market share, etc. This is why companies prioritise the pursuit of growth. A company can choose to grow internally and organically, or externally (by acquisitions). These two options present unique challenges and limitations. However, one common denominator to both options is the need for capital.

Thus, there is the temptation to finance growth through just any means possible. This is especially true for companies offering unique goods or services which are in high demand. The big question therefore is "how safe is this approach?" The debt/equity financing dilemma is as old as the invention of company itself. A choice between the two can decide the ultimate survival of a company. While debt financing has its own limitations and advantages, the choice of equity financing seems a lot more advantageous. But should a company embrace equity financing just because of its attractive rewards? Are there embedded dangers in this option? What protections are available for a company and for individual investors? This article takes a look at these issues.

Not all the expansion options available to a company are ideal. Companies offering unique product or services sometimes need to be wary of private investors who seek to exercise greater control over the business. Debt financing may be a better option for such companies. With debt financing, the owners' interest and control of the company usually remains intact because the lenders generally have no claim to equity in the business. Again, a lender is entitled only to repayment of the loan plus interest, and with few exceptions, he usually has no direct claim on future profits of the business.

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