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Finance for Non-Financial Managers
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business, particularly among commercial banks. Large banks
and small banks are competing for your business, just like the
TV ads proclaim. Every bank offers a range of borrowing
options. Even though banks pay similar rates for the money
they receive in deposits and federal loans, they often have dif-
ferent needs in terms of the kinds of loans they want on their
books. Bank A may have only 40% home mortgage loans when
its target is 50%, so it will likely offer very favorable rates to
attract more home mortgage borrowers. Bank B may have
done that already and now be up to its goal with mortgage
loans but behind target on construction loans, so it will offer
favorable financing to builders to bring in more of that kind of
business. Thus their respective home mortgage rates may be
quite different, even though they both pay the same rates for
their money. It pays to shop around, whether you are an individ-
ual, a small business, or a mega corporation.
A company obtains working capital either by selling a por-
tion of the company to investors (equity)—which we’ll discuss
in Chapter 12—or by getting a loan from a bank or other lend-
ing source (debt). There are seemingly endless variations of
debt, from basic forms of borrowing that we’ll discuss in this
chapter to more exotic borrowing options that are beyond the
scope of this book.
The principal common attribute of all these forms of debt is
that they require repayment at some point, unlike equity financ-
ing, which involves the permanent sale of a share of ownership.
That seems simple enough—but there are exceptions: convert-
ible debt may be exchanged for equity and not repaid, under
certain circumstances, and sometimes equity ownership in an
emerging company carries a condition that the company may
repurchase it, again under certain circumstances.
That said, let’s look at the principal kinds of debt, those you
will likely encounter most of the time, and not concern our-
selves with the unusual exceptions.