What Would Your Finance Manager Say?

Corporations can generate capital by either selling stock or borrowing money. As noted in the chapter, a firm can borrow directly from a bank or issue bonds. Assume that you were one of the founders of a small business start-up corporation. The start-up has some great ideas for developing software applications, but it has no money. Your expertise is in technology, but one of your partners has a background in finance. You suggest that the firm acquires its initial capital by getting a loan from a bank. Your financial partner says the corporation needs to sell stock before seeking debt capital. Why?

After selling stock, the firm decided to supplement its equity (owner) financing with debt capital. Would your finance manager recommend bank borrowing or issuing bonds as the first way to debt finance your small startup?