Topic 1 Sourcefinance - Lecture 1

7/29/2019 Topic 1 Sourcefinance - Lecture 1

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Sources of FinanceChapter 1

MANAGING FINANCIAL

RESOURCES ANDDECISIONS


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Chapter objectives


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Almost half of all newventures fail because

of poor financialmanagement

-Dun & Brandstreet

Why do we need to studyfinance?


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What is Finance?

Who needs money? Every one? you?

Can you or a businesssurvive without cash? Why?

So what is Finance?

First, how to have money


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Personal finance

Where does money for individuals(personal finance) come from:

Our own money in pocket

Borrows: from friends or credit cards

Received from Government if entitled tosome benefits

Earned by doing something or sales ofproducts and services


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Business finance

Business finance: a business has the same source ofmoney for individuals Its own money Borrows: from friends, colleagues, banks and lending

institutions

Received from Government grants. Eg. new indeprived sectors

Earned by sales of products and services From venture capitalists (seeking profit for spare

funds) From private individuals (Business Angels often

seen in entertainment sector) Private companies Microloans


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To obtain funding for a businessproject

Determine how much money is needed tostart your company

Prove to your investor that your companyrequires the predetermined amount ofmoney

Offer incentives, interest, or collateral forthe investors contribution

Make arrangements to pay back the loan


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Classifying businesses

Each type of business can havedifferent ways to finance itself, so weneed to look at types of businessownerships

Sole trader owned by one person

Partnership owned by two or more and

based on agreement among them Limited company: owned by two or more

but separate in law from people who ownand control


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Sources of Finance


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Business Growth


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Internal Sources of Finance and Growth

Organic growth growthgenerated through thedevelopment and expansionof the business itself. Can beachieved through:

Generating increasingsales increasing revenueto impact on overall profitlevels

Use of retained profitused to reinvest in thebusiness

Sale of assets can be a

double edged sword reduces capacity?

Selling more goods and services to consumers is oneway to grow the business.

Title: Home Depot quarterly profit rises 53%. Copyright: GettyImages, available from Education Image Gallery


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Business GrowthExternal

Long Term

Short Term

'Inorganic Growth


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Long Term Shares

Ordinary Shares

Preference Shares

New share issues

Rights Issue

Bonus or Scrip Issue

Loans

Debentures Bank loans (mortgage)

Merchant or Investment Banks

Government/EU

Grants


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Short TermBank loans

Overdraft facilities

Trade credit

Factoring

Invoice discounting

Leasing


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Business GrowthExternalShort Term

Factoring is a financial transaction whereby abusiness sells its accounts receivable (i.e.,invoices) to a third party (called a factor) at a

discount in exchange for immediate money Factoring allows company to raise finance

based on the value of your outstandinginvoices.

Factoring also gives company the opportunityto outsource your sales ledger operations andto use more sophisticated credit ratingsystems.

Offers 80 85% of the total invoice value

Company pays factoring fees
http://en.wikipedia.org/wiki/Financial_transactionhttp://en.wikipedia.org/wiki/Accounts_receivablehttp://en.wikipedia.org/wiki/Invoicehttp://en.wikipedia.org/wiki/Factor_(agent)http://en.wikipedia.org/wiki/Discounts_and_allowanceshttp://en.wikipedia.org/wiki/Discounts_and_allowanceshttp://en.wikipedia.org/wiki/Factor_(agent)http://en.wikipedia.org/wiki/Invoicehttp://en.wikipedia.org/wiki/Accounts_receivablehttp://en.wikipedia.org/wiki/Financial_transaction


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Business GrowthExternalShort Term

LEASING

is a contract between the leasing company, the lessor, and thecustomer (the lessee). The leasing company buys and owns theasset that the lessee requires. The customer hires the asset fromthe leasing company and pays rental over a pre-determined

period for the use of the asset. There are two types of leases:

1: Finance LeasesAn agreement where the lessor receives lease payments to cover itsownership costs. The lessee is responsible for maintenance, insurance,and taxes. Some finance leases are conditional sales or hire purchase

agreements.2: Operating LeasesThe lease will not run for the full life of the asset and the lessee will notbe liable for its full value. The lessor or the original manufacturer orsupplier will assume the residual risk. This type of lease is normally onlyused when the asset has a probable resale value, for instance, aircraft orvehicles.


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'Inorganic Growth' Acquisitions

Merger

Takeover


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External Sources of Finance

Long Term may bepaid back after manyyears or not at all!

Short Term used tocover fluctuations incash flow

Inorganic Growth growth generated byacquisition

The existence of capital markets enable firms to raiselong term loans and share capital.

Title: Dow up on Wall Street. Copyright: Getty Images, availablefrom Education Image Gallery


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Long term (Means?)

Loans (Represent creditors to the company not owners) Bank loans and mortgages suitable for small to

medium sized firms where property or some other assetacts as security for the loan

A mortgage loan is a loan secured by real property

Merchant or Investment Banks act on behalf of clientsto organise and underwrite raising finance

Government/EU may offer loans in certaincircumstances Grants

Shares (Shareholders are part owners of a company onlyin PLCs)

New Share Issues arranged by investmentbanks.


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Short Term

Bank loans necessity of paying interest on the payment,repayment periods from 1 year upwards but generally no longerthan 5 or 10 years at most

Overdraft facilities the right to be able to withdraw fundsyou do not currently have

Provides flexibility for a firm Interest only paid on the amount overdrawn

Overdraft limit the maximum amount allowed to be drawn- the firm does not have to use all of this limit

Trade credit Careful management of trade credit can helpease cash flow usually between 28 and 90 days to pay

Factoring the sale of debt to a specialist firm who securespayment and charges a commission for the service.

Leasing provides the opportunity to secure the use of capitalwithout ownership effectively a hire agreement


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'Inorganic Growth'

Acquisitions

The necessity offinancing externalinorganic growth

Merger:

firms agree to jointogether both mayretain some form ofidentity

Takeover: One firm secures

control of the other,the firm taken overmay lose its identity

Safeway subject to a 3 billion takeover byMorrisons. Securing the 3 billion necessary is aspecialist job.


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Business Angels


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Business Angels

Individuals looking for investmentopportunities

Generally small sums up to 100,000

Could be an individual or a smallgroup

Generally have some say in the

running of the company


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Venture Capital


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Venture Capital

Pooling of capital in the form of limited companies Venture Capital Companies

Looking for investment opportunities in fast growing

businesses or businesses with highly rated prospects May also buy out firms in administration who are

going concerns

May also provide advice, contacts and experience

In the UK, venture capitalists have invested 50

billion since 1983

Documents

Topic 1 Sourcefinance - Lecture 1