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Raising finance- small and medium-sized organisations (forms of finance…
Raising finance- small and medium-sized organisations
forms of finance employed by SMEs
retained earnings
money not paid out in dividends, not capitalized as shares
working capital management
debt factoring
organisation sells its receivables (invoices) to a third party organisation
factoring house-charges a fee
factoring house collects debtors payments
org gets cash promptly, pay suppliers. Reduce task of chasing debtors
bank overdrafts
bank loan- short term finance
finance temporary cash flow shortages
impact cash immediately available
bank facilities
leasing
equity finance- venture capital and private equity
2 points to bear in mind
organisation size and finance employed
no strict relationship between org size and forms of fiance it uses
Finance- liquidity and capital
2 forms of factoring
recourse
factoring house comes back to org in event of non payment
non-recourse
risk of non payment transferred to factoring house-their responsibility
Bank overdraft- negotiations with the bank
maximum size of over draft
interest percentage
fee charge
review period
borrowers financial performance
notice periods
security- form of property
cost of short term finance
Bank facility finance
Capital markets- financial markets for raising of long term finance through bonds.
bilateral facility
borrower raises funds or establishes the right to draw on a banking facility from one bank
interest rate charges- linked to the 3 month money market rate
drawn fee- fee paid by borrower to lender when borrowing funds under bank facility
borrower is paying for the right to borrow under the facility when the funds are required
Lease finance
This where an organisation arranges for a bank to acquire an asset that it needs, (IT equipment)
Then leases it from the bank for a defined term
bank- lessor Organisation- lessee
2 types of lease finance
finance leases
legal ownership of assets remain with the lessor
operating leases
short-term agreements
equity finance
shares take the following types
ordinary
shareholders ownership of company, entitled to share of profits after creditors are paid
not entitled to dividends earnings
preference
shareholders ownership of the company, rate of dividends fixed
share warrants- options that give the holder right to obtain shares at a defined price, strike price