Please enable JavaScript.
Coggle requires JavaScript to display documents.
Raising Finance (SME) [Traditional Methods] (Forms of financing (Equity…
Raising Finance (SME)
[Traditional Methods]
Forms of financing
Retained earnings
Working capital management
Debt factoring
Bank overdrafts
Bank facilities
Leasing
Equity finance
Venture capital
Private equity
Two important points
No strict relationship on finance options used
Liquidity and capital
Retained earnings and working capital
Assets
Cash at the bank
Inventory
Receivables
Less liabilities
Payables
New organisations
Limited resources due to start-up costs
"Negative working capital"
Payables exceed receivables
Provides businesses with free finance
Late Payment
Ability to charge interest on late payment
Enforced by "The Late Payment of Commercial Debts Act 1998"
Gave smaller businesses right to charge for late payments
Businesses upto 50 employees could charge business interests if bigger than 50 employees
Later businesses upto 50 employees could charge anyone for late payment
Debt factoring
Selling of receivables to a third party
provides
cash flow
Reduces credit exposure
Reduces time to chase payments
pitfall
Receivables bought at discount
Two types
Recourse
If no payment factoring house comes back to organisation
Non-recourse
If no payment, factoring house carries the risk
Fees are higher for this service
Example
Bank overdrafts and bank facility
Overdrafts
Size
Interest charged?
Fees?
Review period?
Covenants based on performance
Notice periods?
Secured against assets
Bank facility
Bilateral
Borrower has relationship with one bank
Borrower establishes right to draw
Syndicated
Borrower has one primary bank relationship
Funds to Borrower sold down to Partner banks
Overall rate known as drawn fee
Drawn fee paid by Borrower to Lender(s)
Interest rate linked to LIBOR
Funds can be
Committed (in place and ready to draw)
Uncommitted (No obligation on Lender to provide funds)
Commitment fee normally required regardless of borrowing level
Lease finance
Similar to a loan, lease payments made regularly
A bank (lessor) acquires assets for lease to the business (lessee)
Options at the end of the lease
Pay final payment to own asset
Or enter a new lease on new assets
Two types of lease
Finance leases
benefits and risks passed to lessee
Operating leases
lessor retains risk and benefits only passed to lessee
both types legal ownership remains with lessor
Benefits
Lessor secures borrowing against asset
Lessee acquires assets with low capital cost
Equity finance
Shares
Issued by
Public companies (on stock exchange)
Private companies
Blended returns
Share price increase over time
Dividend payments
Types
Ordinary shares
No automatic entitlement to dividends
Preferred shares
Dividend rate normally fixed
Dividend payable before ordinary shares
Both types have
Ownership of company
Voting rights (limited for preferred shares)
Venture capital and private equity
Private equity
Issuance of non-public shares
Venture capital companies
Issuers of private equity
Mostly supported by
Fund management companies
Hedge Funds
Banks
Angels
Investors with experience (seasoned Entrepreneurs)
Provide capital and mentoring
Benefits to investors
Higher returns due to higher risks
Pitfalls to investors
Higher losses due to higher risks
Risk profile for investors
High risk
Creditors
Ordinary shares
Medium risk
Convertible loan stock or debentures
Bonds or bank loans
Overdraft
Preference shares
Low risk
Leasing
Risk profile for the business
Medium risk
Convertible loan stock or debentures
Bonds or bank loans
Creditors
Leasing
Preference shares
Low risk
Ordinary shares
High risk
Overdraft
