Shares vs Loan
There are two ways a company can meet its requirement of working capital. Either it can go in for bank loans or it can indulge in the exercise of issuing shares to public. Though shares are not commonly regarded as a loan, the reality is that shares serve the same purpose as a loan as they make available capital for expansion or other needs of a company. However, there are differences in these two tools used for generation of financial resources for a company that will be talked about in this article.
Whether loans from a bank or shares from public, both have same effect for a company as company is borrowing money for its operations. But whereas loans from banks are liabilities that need repayment along with interest, shareholders also have expectations from the company as they treat the money that they have lent to a company as a mode of investment and they want attractive rate of return on their investment. They are happy as long as they see share prices going up but are free to unload their shares in the market bringing down the share prices. Thus in both cases, a company has to perform in an efficient manner so as to be able to satisfy the lenders.
Shareholders are much more forgiving than banks as they can wait for a longer period if there is a drop in the performance of a company while banks are stricter and need regular payments of their loan amount. One thing that makes loans more attractive (though they are expensive) than issuing shares is that there is no dilution in ownership in case of loans. On the other hand, shareholders have a stake in the business as they become part owners in the company.
Share capital is less of a burden for a company than a bank loan as company can satisfy shareholders by paying them dividends that is roughly equal to 2-3% of the equity of shareholders every year. On the other hand, loan from a bank has to be repaid along with interest year after year until it is fully repaid.
Shares vs Loan
• A share gives a share or some sort of ownership in the company whereas loan from a bank has no such liability
• Bank loan is much more expensive than share capital
• Bank loan is more strict than share capital as it needs regular repayment along with interest whereas share holders can be satisfied with occasional dividends.