Money is the essence of any business and is necessary at all levels of a business - from the inception of a business to its day-to-day operations till its liquidity, money is everywhere. Therefore, optimal procurement of its finances is a critical business function for every business entity.
Companies acquire money mainly from two sources: Debt and Equity. When you raise money in the form of debt which is either from banks as loans, debentures, or other financial institutions, then you are liable to pay interest on such loans.
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It is the primary objective of the Chief Financial Officer of a company to procure sufficient funds for a company and at the same time ensure that these funds are acquired efficiently.
Therefore, a business funded wholly by debt can turn out to be financially over-leveraged and could affect the profitability of the business. For example - As per a recent report by Fitch, Adani Group is rated Over-leveraged.
Therefore, to keep financing costs in check and at the same time procure funds for the business, a company issues shares of the company in lieu of money which is called Equity Financing. This method is carried out by companies to improve the leverage of a company as too much debt hampers the profitability of a company.
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