The hybrid financing definition includes characteristics of both debt and equity, two ends within the financial spectrum. We can therefore say that hybrid financing is where debt and equity meet in the middle, offering investors the potential benefits of both.
For any organization, securing capital is paramount to the success of a business. According to the U.S. Small Business Administration, the most common sources of capital for financing business expansion are; personal or family savings, business profits and assets and business loans. These are just a few financing options that a business may use to operate and grow.
When you encompass traditional investment models and actual investing options, you will find out that hybrid financing creates more potential for businesses to gain capital by merging business types with previously inaccessible investing opportunities. This newer method of financing is just one strategy entrepreneurs can explore when seeking funding for business expansion.
The advantages and disadvantages of hybrid financing align with the positives and negatives associated with debt and equity. The risk is similar to any investment, regardless of type, but the benefits include access to cash and assets connected with both equity and debt for investors. For the organization, hybrid financing can provide regulatory or tax benefits.
Capital derived from hybrid sources can be raised through a variety of options. Potential sources of hybrid financing include:
- Preference capital: this special type of hybrid financing requires a company to share dividends with her group of investors before paying out common stock dividends. This minimizes risk since these shareholders are paid first, creating a greater chance of funds being available should the company get into financial trouble.
- Convertible debentures: a type of long-term debt issued by a company that can be converted into shares of equity stock after a specified period. This type of hybrid financing is paid back after other fixed-income holders receive their dividends.
- Hybrid securities: this broad category of hybrid financing is often broken down further into specific areas such as commodity risk, foreign exchange risk, interest rate risk, and even an area focused on diminishing the seniority disparity between bondholders and stockholders. Returns for this type of investment are often associated with a set of common economic variables, such as; commodity price, interest rate, and foreign exchange rate, among others.
Overall, this strategy creates versatility for organizations who find themselves unable to close the gap between multiple traditional financing outlets.
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