To ensure a company’s long-term survival and prosperity, finance managers need to make decisions about the gearing of the company. Gearing is the relationship between equity capital invested in the business and long-term debt. The higher the gearing (in other words, the greater the proportion of long-term debt), the more exposed the company is in times of economic difficulty.
The first form of equity is the owner’s capital. This is the most exposed form of capital since a return is received only after all other calls on a company’s profits have been satisfied. In an extreme case – bankruptcy – the owner’s equity will be repaid only after everyone else, including employees, creditors, banks etc., has received what they are owed. On the other hand, in successful times, the owners have a claim on all the net profit of the company.
An owner does not need to rely entirely on his or her own funds. S/he can go to other sources of equity finance. There are three main sources: firstly venture capital: this is usually provided by venture firms interesting in financing high-growth companies. However, the provider usually demands a much faster and higher rate of return than an owner would expect from his/ her own capital. On the other hand, the venture capital company does not usually interfere in the running of the company.
