What Are the Different Types of Corporate Finance Strategy?

Geri Terzo

When companies use the financial markets to raise money, the result might be similar in that the end result offers access to capital. The way that each organization chooses to use the markets, however, often varies. It is common for each entity to have its own corporate finance strategy, with the potential for similarities or perhaps even similarly structured deals. This method might be based on the strength of an organization's balance sheet in addition to the economic and market environment and investors' interest in particular deals. A strategy for corporate finance could include a high degree of risk or might not, and it might involve a disciplined approach where debt is issued and must be repaid.

A corporate finance strategy might include receiving a capital injection, or investment, from one backer.
A corporate finance strategy might include receiving a capital injection, or investment, from one backer.

The ultimate corporate finance strategy for most if not all publicly traded corporations is to improve value for shareholders and continue to increase profits. Of course, the way that each organization goes about this in the capital markets varies, but the concept is to improve profitability and subsequently reward investors with greater gains. Executives who determine a corporate finance strategy include a chief financial officer and others in management, in addition to a board of directors.

A corporate finance strategy might include receiving a capital injection, or investment, from one backer. If this is the case, the strategy might be to receive all of the investment in one lump sum or to receive the allocation in tranches, which is to break up the investments into multiple distributions. Deciding to use this strategy might depend on whether the capital is needed to fund long-term activities or perhaps to perform an event in the near term. A corporate finance strategy might include the consideration of agreeing to certain terms with an investor at the onset in the event that an issuer decides to raise money elsewhere even as the former relationship is still active. As a result, an issuer can maintain autonomy for separate fund-raising efforts.

Risk might be a component of a corporate finance strategy. Most transactions in the capital markets involve some risk, but some carry more than others. A company's strategy might be to go out on a limb and raise money — either equity or debt — for a project. The future revenue from that endeavor might be unclear and might be a risky venture on the part of that issuer. If the project does not produce the desired sales, equity investors will not see the anticipated benefits in the value of the stock, and debt investors might be at risk of not being repaid.

When a corporation issues debt, this is a disciplined approach that requires continuous payments to be paid to investors. In this strategy, an issuer is prepared to use income to make interest payments to investors over the life of the debt securities. This approach might support a long-term budget because the issuer becomes accountable for certain funds for a predetermined period of time.

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