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The following article is part of an ongoing educational series. The previous article can be found here.

In our ongoing series of educational articles, we have looked at how new companies go about raising equity. However, established companies often need to raise extra funds as well.

And if a company requires a cash injection to expand its existing operations, protect its market share, develop new businesses, or buy another company, it may require more than its retained earnings.

In that case, the company's directors have two options: borrow the money, or raise more equity.

Taking on debt requires the company's managers to have a reasonable expectation of steady cash flow to make regular interest repayments, plus it has the risk that investors may feel the company is too highly geared (has too much debt in relation to its shareholders funds), which may weigh heavily on the share price.

Taken to the extreme, high debt magnifies the risk of bankruptcy, which is precisely what happened in the late 1980s when rising interest rates crippled some of Australia's highest-profile companies. Banks stopped lending during the 2008/09 financial crisis, which forced many listed Australian companies to raise equity funds at vastly discounted prices in order to remain afloat.

Interest is a tax-deductible expense, however, and less equity raised means less of the company is being shared around. So debt certainly has its attractions.

Corporate finance strategists charge big money to decide on the best way for companies to raise funds and, despite years of effort, research remains inconclusive on the ideal capital structure to maximise a corporation's value to shareholders.

It's a complex area that spans issues as diverse as taxation, interest expense, public relations, and overall financial management, and that's probably all that needs to be said about it for now.

If a company chooses to issue fresh equity, it's again faced with two main options: give all existing shareholders the right to buy more shares; or offer shares in a "placement" to a group of people, or an institution.

It also has the third, less common, option of creating a specialised spin-off company, which gives investors the opportunity to direct funds toward a specific aspect of the business, usually with high growth prospects.