Even though the selling firm gets less than face value for its accounts receivable, it does receive needed cash immediately. Moreover, it has shifted both the task of collecting and the risk of nonpayment to the factor, which now owns the receivables. A form of factoring called forfaiting is an increasingly popular method of financing international transactions. Table 19.2 compares the various types of short-term financing. For corporations, equity-financing options include the sale of stock and the use of profits not distributed to owners.
Equity financing is attractive to large corporations for at least two reasons.
The corporation doesn't have to repay money obtained from the sale of stock. The corporation is under no legal obligation to pay dividends to stockholders. A share of common stock represents the most basic form of ownership. As noted in Chapter 4, the owners of preferred stock usually do not have voting rights, but their claims on dividends and assets precede those of common stock owners. If the board of directors approves dividend payments, holders of preferred stock must receive their dividends before holders of common stock receive theirs.