Download 3.1 Sources of Financing Part 2

3.1 Sources of
Financing
Topic 3
Part 2
Evaluation of Internal Financing
 No direct cost to the business
 Does not increase the debt of the company
 No risk of loss of control of the company to
another party
 No shares are sold to others
 New or unprofitable companies have few assets
to sell to raise cash
 Growth will be constrained by limited cash
resources
Loans VS Leasing
 Hire Purchase (A LOAN)
 Purchasing an asset over a period of time

Example: buying car or equipment using loan
Ownership
 Leasing

A contract with a company to pay a fee but
not actually acquire ownership of the item.
 Example: leasing a car, or equipment
No Ownership
Debentures
 Debentures (Corporate Bonds)

Bonds issued by a company to raise
money and they are usually issued with a
fixed rate of interest
Savings Interest Rate to
Depositors @ 1% Interest
Loan @ 15% Interest to businesses
Bank makes 14% Profit
Bond @ 10% Interest to People
People make 10% Interest vs 1% at the bank – 9% increase
Business SAVES 5% on Loan Interest by NOT using the bank
Sales of Shares of Stock
 Corporations may sell additional shares of
stock.

Privately held corporations may sell additional
shares of stock to their current stockholders.
This does not introduce new owners & is called a
Rights Issue.
 Rights Issue

Existing shareholders have the right to purchase
more stock at a discount in order to raise capital for
the business.
Sales of Shares of Stock
 Can sell shares of stock to the wider public
by “going public”

Can raise substantial sums of money but introduces
new shareholders.
 AIM – Alternative Investment Market
 A London based stock exchange designed to allow
limited stock offerings to raise limited amounts of
capital.
 Full Stock Exchange Listing
 Public Issue by Prospectus – advertises the
business’s stock for sale on the stock market. This
is an expensive undertaking.
Evaluation of External Financing
Debt VS Equity Financing
 Debt Financing
 No shares are being sold so ownership does not
change or become diluted with additional shares of
stock
 Loans and bonds will be repaid – so this is not
permanent
 Lenders have no voting rights
 Interest on loans is paid before taxes / Dividends
are paid after taxes are paid on profits
 Additional costs of interest payments
 Equity Financing
 Never has to be repaid
 Dividends do not have to paid to stockholders
 Ownership diluted by selling more shares of stock
Other Sources of Financing
 Grants

Government agencies willing to fund
businesses that will establish themselves
in particular locations or create jobs.
Economic Development Funds
Other Sources of Funding
 Venture Capital


Capital invested in business start-ups or
expanding small businesses that have
good profit potential but cannot find funding
from other more traditional sources.
Shark Tank
Financing Options Sole Traders &
Partnerships VS Corporations
 Sole Traders & Partnerships
Cannot raise money with sale of stock
 Unlikely to be able to issue a bond
They CAN
 Bank Overdrafts (credit lines)
 Loans
 Trade Credit (credit from suppliers)

Bank loans will be limited unless personally
guaranteed by the owners personal assets.
Micro Finance
 Provides small
capital investments
(loans - $20) to
impoverished
entrepreneurs with
no other means to
access financing for
their small
businesses.
Recap
Retained Profits
Sale of Assets
Reductions in Working Capital
Internal
Sources of
Finance
(limited companies)
Share Issue (Sale of Stock)
Debentures (Bonds)
Loans
Grants
Leasing
Hire Purchase
Loans
External
Bank Overdraft (credit Lines)
Bank Loan
Creditors
Debt Factoring (Selling A/R)
Long Term
Medium Term
Short Term
Factors that Influence
Financing Choices
 What is financing needed for which
affects the time period required to
finance
 Cost
 Amount required
 Legal business structure and desire to
retain control
 Size of existing borrowing
 Variable needs (seasonal sales)