Final answer:
Obtaining new-venture financing can vary in difficulty; small companies often seek funds from private investors due to the lack necessary for an IPO and prefer IPOs over loans for flexibility in growth. Venture capitalists likely have better insights than bondholders into the potential profitability of small firms due to their specialized due diligence.
Step-by-step explanation:
Obtaining new-venture financing:
The ease or difficulty of obtaining new-venture financing today can vary widely depending on many factors, including market conditions, the nature of the business, and the availability of investors. Traditionally, small companies have preferred raising money from private investors such as angel investors and venture capitalists because they often lack the history and financial structure required for an Initial Public Offering (IPO). These very small companies are not yet profitable, making it hard to provide a rate of return on investment through traditional methods like loans or bonds.
Small, young companies may favor an IPO over borrowing from a bank or issuing bonds as it allows them to raise large sums of capital without the need to repay a specific amount at regular intervals. It also frees them from the constraints of loan covenants or the fixed interest payments required from bondholders, allowing more flexibility for business growth.
It is important to note that from a firm's perspective, a bond is similar to a bank loan in that both require regular payments. However, a bond provides longer-term capital compared to traditional bank loans and may be more flexible regarding repayment terms and covenants.