According to the "pecking order theory" in modern capital structure theory, the first choice of enterprise financing is the internal funds of the enterprise, which mainly refers to the after-tax profits retained by the enterprise, and external financing will be carried out when the internal financing is insufficient. In external financing, first choose low-risk debt financing, and then issue new shares. There are three reasons for choosing financing methods, which are as follows:
(1) The internal financing cost is relatively low, with minimal risk and flexible and independent use. Enterprises with internal financing as the main financing method can effectively control financial risks and maintain financial stability.
(2) The increase of debt ratio, especially high-risk debt ratio, will increase the financial risk and bankruptcy risk of enterprises.
(3) Enterprises' preference for equity financing can easily lead to inefficient use of funds. Some companies invest the raised equity funds in unfamiliar projects with low return on investment. Some listed companies even change the use of funds at will in the prospectus, and the profitability of the changed use of funds is not guaranteed. Under the prospect that the business performance of enterprises has not been greatly improved, new equity financing will dilute the business performance of enterprises, reduce earnings per share and harm the interests of investors. In addition, with the development of China's capital market system, the threshold of enterprise equity refinancing will increase and the refinancing cost will increase.
The financing order of most listed companies in China is stock issuance first, followed by debt financing and finally internal financing. This financing sequence is likely to lead to inefficient use of funds, weaken financial leverage and encourage the preference of equity financing.
2. Considering the actual situation, choose the appropriate financing method.
Enterprises should choose more suitable financing methods according to their own operating and financial conditions and considering the changes of macroeconomic policies.
(1) Consider the impact of the economic environment. Economic environment refers to the macroeconomic situation of enterprise financial activities. In the period of rapid economic growth, enterprises need to raise funds to increase fixed assets, inventory and personnel to keep up with economic growth. General enterprises can obtain the required funds by issuing additional shares, bonds or borrowing from banks. When economic growth began to slow down, enterprises' demand for funds decreased. Generally, it is necessary to gradually reduce the scale of debt financing and use debt financing as little as possible.
(2) Consider the capital cost of financing. Capital cost refers to the cost incurred by enterprises in raising and using funds. The lower the financing cost, the better the financing income. Because different financing methods have different capital costs, in order to obtain the required funds at a lower financing cost, enterprises should naturally analyze and compare the capital costs of various financing methods and try to choose the financing method and financing combination with low capital cost.
(3) Consider the risks of financing methods. Different financing methods have different risks. Generally speaking, the debt financing method must repay the principal and interest regularly, so there may be the risk of non-repayment, and the financing risk is even greater. The equity financing method has little financing risk because there is no risk of repaying principal and interest. If the enterprise adopts debt financing, once the enterprise's earnings before interest and tax decrease, the after-tax profit and earnings per share decrease faster, which will bring financial risks to the enterprise and even lead to the risk of bankruptcy. The bankruptcy of several major investment banks in the United States is related to the abuse of financial leverage and the neglect of risk control of financing methods. Therefore, enterprises must choose the appropriate financing method according to their own specific conditions, considering the risk degree of financing methods.
(4) Consider the profitability and development prospects of the enterprise. Generally speaking, the stronger the profitability, the better the financial situation, the stronger the liquidity and the better the development prospect, the stronger the ability to bear financial risks. When the investment profit rate of an enterprise is greater than the interest rate of debt funds, the more debts, the higher the return on net assets of the enterprise, which is more beneficial to the development of the enterprise and the owners of equity capital. Therefore, debt financing is a good choice when enterprises are in a period of rising profitability and good development prospects. When the profitability of enterprises declines, the financial situation deteriorates and the development prospects are not good, enterprises should use debt financing as little as possible to avoid financial risks. Of course, enterprises with strong profitability and strong ability to expand their equity can raise funds through equity financing or equity financing and debt financing if they have the conditions to raise funds through new shares or additional issuance.
(5) Consider the degree of competition in the industry where the enterprise is located. When the competition in the industry where the enterprise is located is fierce, it is easy to enter and leave the industry, and the profitability of the whole industry declines, equity financing should be considered and debt financing should be used cautiously. When the competition in the industry where the enterprise is located is low, it is difficult to enter and leave the industry, and the sales profit of the enterprise can increase rapidly in the next few years, we can consider increasing the debt ratio and obtaining financial leverage benefits.
(6) Consider the control right of the enterprise. Small and medium-sized enterprises often lose ownership and control in financing, which leads to profit diversion and loss of interests. For example, the mortgage of real estate license, the disclosure of patented technology, the conversion of investment into shares, the exposure of important upstream and downstream customers, and the clarification of internal privacy of enterprises will all affect the stability and development of enterprises. On the premise of ensuring considerable control over enterprises, we should not only achieve the financing purpose of small and medium-sized enterprises, but also transfer ownership in an orderly manner. Issuing common stock will dilute the control right of the enterprise, which may make the control right lag behind others, while debt financing generally does not affect or rarely affects the control right.