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What are Financing Activities?

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  • Written By: Geri Terzo
  • Edited By: A. Joseph
  • Last Modified Date: 20 January 2019
  • Copyright Protected:
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    Conjecture Corporation
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The financial markets offer a host of options for companies that are looking to raise capital. These financing activities are limited in many cases by the expertise and imagination of the corporate executives and investment bankers on a deal. Activity in the financial markets could occur in the equity capital markets or the debt capital markets. Depending on where deals are placed, financing activities could include issuing shares of equity to the public in an initial public offering (IPO) or selling bonds in a fixed income deal among other events. There is preparation that goes into every financing activity, and the driving force behind and details within each transaction will differ.

A company initiates financing activities as a means to generate cash flow. Those funds eventually are reported on the company's balance sheet, and the presentation will vary depending on the exact deal that occurred. Company executive teams will employ one or more investment banks to lead the financing activities.

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An IPO is a major financing deal that often precedes any other transaction in the public markets. In an IPO, a company issues equity shares for the public to purchase, ultimately giving shareholders part ownership in that corporation and an opportunity to share in profits. Between the company's key leaders and the investment bankers, certain parameters are set, such as the price of the IPO. This is determined by a combination of factors including market conditions and the growth and profitability outlook for the company.

In addition to equity, a company might decide to pursue debt financing. This is when shareholders lend a company money through the purchase of corporate bonds or bank debt. These deals also are led by company executives and bankers, but unlike with equity, the face value of the bond investment is returned to the investor. This repayment occurs when the bond matures at its expiration date. Also, ongoing interest rate payments are made to investors at a pre-determined rate.

Companies turn to the capital markets with financing activities for different reasons. Often, the money is raised in an attempt to help that corporation reach its desired growth. This could come in the form of an expansion, a merger or an acquisition. Companies in the pharmaceutical industry might need to raise money to develop a drug, because these clinical trials can be lengthy and expensive. Also, a corporation that is under financial duress and facing potential bankruptcy could issue debt in the financial markets in an attempt to restructure and turn itself around, but in this case, the investors will be taking on a risky proposition.

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