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Equity and debt American Superconductor Corporation (AMSC) is one of the leading electricity solutions companies. Recently the company declared that it is going to sign a registration statement with the U. S. Securities and Exchange Commission in order to propose its Common Stock for sale to the public.
This plan changes the company's earlier declared tenable debt financing plan to raise $ 50 million as a term loan, adaptable subordinated notes and a operational funds credit facility: "AMSC's management and board of directors believe the decision to forego a secured debt financing and to adopt an equity financing strategy under current market conditions is in the best interests of our shareholders, " said Greg York, chief executive of American Superconductor. American Superconductor creates products and solutions in order to radically advance the price, effectiveness and steadfastness of the generating, delivering and using of the electric power. The companys products portfolio is supported by 500 patents and licenses including technologies fundamental to Revolutionizing the Way the World Uses Electricity (TM). The equity and debt financing have its advantages and disadvantages. Lets analyse these new terms and understand the reasons that made the American Superconductor Corporation accept this solution. Debt and equity financing are two types of financing of every business.
Debt financing is a loan. You take money from the other source and have a fixed term to pay them back. This method means that you have a debt, that you owe money to some person or organization that has no relations to your own business. There isa short-term and long-term financing. Debt financing have the following advantages: you provide maximum control over your own business, debt financing has tax deductible interest.
Also it has the following disadvantages: if you have a debt and no enough money to pay it back, that can create you big problems, if you have a debt, your business is not attractive to investors. Equity financing is an exchange of money for a part of ownership in the business. It is considered to be "easy money" because you have no debt. It has the following advantages: you dont have problems with repayments, because lenders receive their money automatically Investors make your business attractive for new lenders And the disadvantages are: As a owner you are not able to provide the maximum control over your own business, course you depend on your partners-lenders. You have a risk to get a reputation that you have no belief in your own business venture. When bankers or investors are deciding on giving you money or not, they will pay their attention debt to equity ratio, that means your debt compared to your equity.
This information is important because it shows how much money you have for repayment in case of failure and if your business is rather independent. When a company is considering of what type of financing to choose it should pay attention to its business strategy. It includes the questions: how much control it needs, what its long-term goals are. It must take into account that equity financing may lead to the controversy between you and your investors in terms of business decisions.
Sometimes these controversies can be so serious, that youll have to terminate the cooperation with your investors. If you have your own serious ideas about what you want to do in your company equity financing is not for you. After analyzing the definition and advantages of these two types of financing, lets return to the American Superconductor Corporation and determine what reasons it has to turn to the equity financing. There are several major factors that could cause changing in financing: uncertainty about the ability to consummate a public offering or other financing uncertainties about the ability to get the funding from corporate and government contracts, to develop, manufacture and market commercial products, the risk of not developing the company products by a robust market the risk that strategic alliances and other contracts may be terminated; the risk that the developed technologies will infringe the rights of others the companys competition, including large companies in Japan; the amount of companies cash needs and the availability of good financing sources. So we see that American Superconductor Corporation had important reasons for accepting equity financing. Debt financing and equity financing have their advantages and disadvantages, but every company should pay attention to its own case on deciding what type of financing to choose.
Every business has its own reasons for accepting of this or that type of financing. Bibliography 1. web 2. Stewart, Louse Creating your business, New York 2003.
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