Banks have historically played a very important role in business financing

Well suited to the financing of seasonal or other temporary cash flow shortages

Form on working capital management, as directly impact avail cash

Bank finance is a major source of funds, particularly for organisations that have neither the critical size (to support the costs of entry) nor credit standing (including credit ratings) to borrow money from the money and capital markets

The capital markets are the financial markets for the raising of long-term finance through the issuance of bonds and other securities - long-term partner of the money markets

Forms:

• 'bilateral' facility, where the borrower raises funds or establishes the right to draw on a banking facility from one bank
• 'syndicated', where a number of banks have a share in the facility, with the borrower drawing funds from each – an arrangement which means that the credit risk to the lending banks is shared.

The interest rate charged is usually linked to the prevailing 3-month money market rate, known as 3-month LIBOR, with the bank(s) adding a margin to LIBOR when lending under the facility. This overall rate charged to the borrower is known as the drawn fee.

For these facilities to be of practical benefit, they must take a ‘committed’ rather than an ‘uncommitted’ form. Committed means that provided the organisation is complying with the terms of the facility agreement, funds may be drawn down when required - includes fee, right to borrow when needed.

• Leasing is where an organisation arranges for a bank to acquire an asset that it needs and then leases it from the bank for a defined term.
• The bank is the ‘lessor’ and the organisation the ‘lessee’.
• Akin to repayments on a loan.

• At the end of the term of the lease the lessee may make a final payment to secure ownership of the assets.
• Reality: org may want to acquire replacement assets, may seek a new leasing agreement.

• Finance leases: , legal ownership of the assets remains with the lessor (the bank), with all the benefits and risks associated with the leased assets being transferred to the lessee

• Operating leases – which typically are short-term agreements – see the lessor retain the risks and benefits of the leased assets (in effect borrowing and making rental payments).

• Benefits:
• Lessor retains ownership of assets, security in event of defaulting - form of secured borrowing
• Lessee - cash flow benefits, no costly upfront commitment (also provides means to buy, when they couldn't borrow up front)
  

Both public and private incorporated companies can issue shares in order to finance their operations.

Those who invest in shares expect a return blended from dividend yield (dividend paid divided by the prevailing share price) and capital growth, which is the increase in the share price over time

• Dividends are the payments (typically annual or half-yearly) to investors in shares.
• Size linked to the financial performance of the company, paying is at the discretion of company, subject to approval by its shareholders.

• Ordinary Shares: give the shareholders ownership of the company and entitlement to a share of the profits of the business only after the creditors, including bondholders and the banks, have been paid
• have voting rights but no automatic entitlement to dividend earnings
• stand behind preference share holders

• Preference shares – Like ordinary shares, these give shareholders ownership of a company, but the rate of the dividend on preference shares is usually fixed and, as noted above, is payable before an ordinary share dividend can be paid.
  
  • Most preference shares are cumulative. This means that all back payments of dividends on preference shares (if overdue) have to be paid before an ordinary share dividend can be paid
  • usually only have voting rights in the event of a major issue affecting the company, such as an alteration of its capital structure.

• Nominal value (face value of security - amount paid on maturity date) - determines statement on balance sheet
• if issued above the par value, the difference is termed the share premium
  

Market value - price at which currently bought/sold in market

• When new private companies issue shares, a major target group of investors, apart from the founders of the company and its management, are venture capital companies

• Venture capital companies are suppliers of private equity finance to new or recently formed companies, although increasingly, in recent years, they have targeted more mature companies. Private equity relates to non-public issuance of shares.

• For many companies private equity together with retained earnings have been a sufficient source of finance, allowing these companies to avoid listing on a stock exchange

• Most are supported by investments from banks and fund management companies, including hedge funds

• The benefit to companies that provide private equity finance is the prospect of higher returns from their investments than through conventional investments in shares listed on stock exchanges. The spread of returns is, though, likely to be far wider - riskier investments

• Because the latter are more mature and have lower ‘gearing’ than the companies financed by private equity. Gearing is the measure of the amount of debt an organisation has in its capital structure. Typically this is the debt/(debt + equity) ratio – the market value of debt as a percentage of the total market value of debt and equity combined.

• A subset of venture capital investors are angel investors. Typically invest in smaller companies at the very early stages of their life span. So called angels are high-net-worth individuals who invest on their own, or as part of a syndicate with other angels in larger deals.

• Preference over public share offering:
• May not be avail through public route
• Less onerous compliance and corporate governance environment and cost avoidance
• Usually faster
• Less exposed to predatory attacks by take overs

As a company grows and establishes a track record of performance, a point may be reached where it needs more finance to support the development of the business. Additionally, the founders of the company and those other investors who have provided the initial private equity may want to realise (i.e. sell) at least part of their investment. It is at this point that the company may go to the public equity market to raise capital. This activity is known as an ‘initial public offering’ of shares.