Efficient capital structures for manufacturing companies

Posted: October 23rd, 2013

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Efficient capital structures for manufacturing companies

A capital structure refers to the percentage of different kinds of capital involved in a certain commercial organization. These types of capital may either be debt or equity capital. The analysis of these types of capital is essential in the proper management of any business. They influence both the company’s gains as well as the possibility of incurring losses. The equity capital entails the money owned by the business’ stakeholders in terms of both dividends and initial capital. On the other hand, the debt capital refers to the money loaned to the business either as short-term or long-term loans.

There are various types of capital structures that are applicable in a manufacturing company. Mezzanine debt is one of these structures. It provides the manufacturing company with loans depending on the size and value of their company. It is appropriate for manufacturing industries since the manufacturers are able to retain a vast portion of the company’s profits despite the debt. Moreover, the manufacturer gets to retain full ownership of the company. Additionally, one can have more than one loan lenders that ensure that the company has sufficient money to run the business.

Furthermore, the participating debt capital structure can suit many manufacturing companies. Depending on the company’s value, one can get a large sum of money from a money-lending institution. It similar to the mezzanine debt structure in that one can repay the money in several installments. However, unlike in the mezzanine debt structure, one can only get the money from one lender. It is beneficial to the manufacturer as he may need large sums of money that he does not have, to run the business.

Use of these two types of capital structures will ensure a high cost of capital. In most cases, lack of sufficient cash is the main hindrance of manufacturing companies from expanding their firms. These structures allow manufacturers to pay their loans in installments that protect them from experiencing extreme difficulties in the repayment of these funds. Moreover, the manufacturers are assured of full ownership of the company under these capital structures. This means that they will not have to share their profits with the lenders unlike in other types of capital structures.