Notesale: Turn your study into money

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Week 9 & 10 Financial Reporting: Sources of Finance
External sources of finance:
LONG TERM
- Ordinary shares: higher return = higher risk: Shares depend on how well the business
performs in terms of profits
...
, 2012)/ (Berry, 2011)

Businesses need to be aware of the risk element of long-term financing:
- Sources that are cheap in terms of servicing costs (loans) are riskier than those that
are more expensive (Equities)
- High returns = high risk

ORDINARY SHARES
- The shareholders’ stake in the business
- Shareholders only obtain dividend if profits available for distribution still remain
after other investors and lenders have received their share of the profits
...
, 2011)
- Stake in the business is reflected by the control that they have over the business
...

- Only receive a dividend if profits available for distribution remain after other
investors (preference shareholders) receive their dividend
...
= individual shareholder is taxed on company profit and on
the dividend
...

- ISSUING ORDINARY SHARES:
- Issues to the public are rare
...
, 2011)
- Low risk for shareholders – less than ordinary shares
- Some risk to ordinary shareholders, as preference shareholders are entitled to
dividend before ordinary shareholders if the business performs bad as well as
dividend for the current year before an ordinary share divided can be paid – take
shares before it reaches ordinary shareholder
...

- Cheap for the business, depending on the interest rates and low level of return
expected by investors
- Interest is tax deductible to the business, making it even cheaper for the business,
but taxable in the hands of lenders
...
(ST = paid within a year, Lt = paid after a year)
+ no control is lost
+ Fixed interest rate = can plan future payments = improves financial stability
X High interest rates
CONVERTIBLE LOAN NOTES
- Gives investors the opportunity to exchange loan notes for ordinary shares in the
business = loan notes exchanged for a number of shares (Atnill et al
...
g
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(Atnill et al
...
High purchase agreement
- 2
...
Asset purchased and paid for immediately
- 4
...
Regular payments made over time
Borrow money to pay for a particular asset
SECURITISATION PROCESS
- Occurs when a business has a consistent has a cash inflow, allowing a business to use
it as collateral
- Using the promise of regular income to secure a loan from a financial institution
- Assets transferred Asset-backed bonds issued
- Income from assets Interest paid on bonds
The securitisation process turns assets with high receivables into security, as the debt owed
to the business is put into a different entity (SPV), which is sold to another investor
...

+ = becomes attractive to investors
...
Goods supplied on credit
- 2
...
Factor pays 80% to client immediately
- 4
...
Factor pays 20% balance to client when credit customer pays amount owing
Types of debt factoring:
Resource factoring: Where the business assumes responsibility for bad debts
Non-resource factoring: Where the factor assumes responsibility for bad debts
Invoice discounting is preferred to debt factoring as:
- It’s confidential
- Charges are lower

-

Control over all aspects of customer relationship is retained

GRANTS FROM PUBLIC FUNDS
- Mainly from government/EU
- Designed to encourage businesses to act in a certain way
- Schemes frequently changes to help businesses (e
...
supporting methods of
sustainability)
Considerations of Long term versus Short term funding:
- Matching borrowing with assets held
- Flexibility
- Refunding risks
- Interest rates
Short term internal sources of finance:
- Reduced inventory levels
- Delayed payment to trade payable keeps money in the business a bit longer
- Tighter credit control
Long term internal sources of finance:
- Retained profits
Pecking order theory and long-term financing
- Retained profits will be used to finance the business if possible
- Where retained profits are insufficient, or unavailable, loan capital will be used
- Where loan capital is insufficient, or unavailable, share capital will be used
Two important roles of the Stock Exchange
- Primary market
- Secondary market
Advantages/disadvantages of stock exchange listing:
+ easier to raise funds: anyone can buy shares
+ funds acquired at lower costs
+ raises profile
+ shares values in efficient manner
+ broadens investor base
+ allows other businesses to be acquired by shares instead of cash
+ can help attract and retain employees
X Cost: lots of regulations need to be followed and a lot of expectations that need to be
met
...

+Large amounts of funding
+Active involvement to improve the business as they aim to improve all aspects of the
business (Blackman, 2014)
+Experts at looking at new businesses and are willing to invest if they see potential
X Loss of control (Blackman, 2014)
Alternative investment market: stock exchange for smaller listed companies
+No minimum shares issued to public needed, whereas main market does
+No trading record required, unlike main market
+No prior shareholder approval for transactions needed, unlike main market
+Admission documents not pre-vetted
+No minimum market capitalisation needed, unlike main market
+Less regulation over main market
Business angels
+Willing to take risks in exchange for a share of the business
+Make decisions quickly
+Offer useful skills and experience (e
...
Levi Roots)
Government assistance

Types of investment in private equity:
- Venture capital
- Expansion capital
- Replacement capital
- Buy-out and buy-in capital
- Rescue capital

Investment process:
1
...
Evaluate available investment opportunities and make a selection
3
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Implement deal and monitor progress
5

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