Companies usually have projects that cost them large amounts of money. In this regard they have to seek for sources of capital to support such projects. The source can be internally from the revenues they generate and it can also be external. The external sources of capital include debts and equity. When a company is considering searching for an external source of capital it will have to go through the capital markets and decide on which types of funds to raise. A debt is the major source of outside capital that a company can get. They can be acquire through a contract and is senior than the equity. The interests made on debt claims are tax deductible while dividends on equity claims are not.
Typically there are two types of debts that a company can utilize in acquiring capital to run projects; the public debt offering and the private debt offering. Ideally this refers to the method in which the debt is acquired through. The public debt offering is used when a company needs to raise a substantial capital. To raise capital using the public debt offering the corporate will be selling hares or equity to public investors; through initial public offering (IPO). Alternatively a company can consider going public and start being regulated by SEC. In this case it can consider selling its shares to the public to raise capital. In this context, the public offering revolves around IPO and the stock exchange. The private debt offering is used when the capital being raised is much smaller (Glushkov, Khorana, & Rau, 2015). Therefore the company does not need to go public. When looking for this type of debt a company will just contact a limited number of potential investors. The private debt offering also involves capping of the amount raised and in most cases an announcement is not made to the public on the amount raised.
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The public offering differs from private offering in the sense that the capital raised on public debt has to be obtained from registered securities. They can also be traded on public secondary markets such as the New York stock exchange or the American stock exchange. Private debts are financial claims that are exempted from registration requirement. The private debt can only be acquired from a small group of sophisticated investors. Around 70 percent of the corporate go for public debt while the rest settle for private debt (Grinblatt, & Titman, 2016). An example of private debt offering is a case in which Dell had a private offering to raise $24.4 billion in 2013. Amazon was also involved in a private debt offering in bid to raise $16 billion to fund acquisition of whole foods market. a good example of public debt offering is a recent incidence in which the Time Warner company commenced a public offering to raise capital for general corporate purposes.
References
Glushkov, D., Khorana, A., & Rau, P. R. (2015). Why Do Firms Go Public through Debt Instead of Equity?.
Grinblatt, M., & Titman, S. (2016). Financial markets & corporate strategy .
