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Reading 16: Raising finance - small and medium-sized organisations -…
Reading 16: Raising finance - small and medium-sized organisations
Introduction
Forms of finance
retained earnings (post tax)
working capital management
debt factoring
bank overheads
bank facilities
leasing
equity finance (venture capital & private equity
Organisation size and finance employed - large also use some of these and likewise small/medium adopt others
Finance: liquidity and capital -
Financing through retained earnings and working capital management
Working capital - cash at bank, value of stock, cash due from customers, less the cash due to be paid to suppliers
Can take some start up business awhile to have "working capital" and can even be in negative working capital where expenses are higher and creditors are helping
Financing through deb factoring
exercise in both credit exposure reduction and cash flow management employed by many small and medium sized organisations. Factoring is where an organisation sells its account receivables (ie its invoices) to a thrid party (factoring house) at a discount to the total value of the recieveable amounts.
Factoring is, in effect, another way of using working capital management to finance an organisation. It involves an organisation entering into an agreement with a factoring house. The house acquires the organisations trade debts - at a discount - as they arise in the course of its business in return for payments to the orgnisation.
The factoring house then has the right to these trade debts whilst the organisation has simultaneously reduced its credit exposure to its business customers and improved its cash flow
Whilst there are many variations on the amount advanced and the terms, the factoring house might initially pay up to 90% of the trade debt to the client organisation after deducting its charges. The remaining balance is only paid if and when the organisations debtor pays the factoring house. By holding back part of the payment to the organisation, the factoring house gives itself some protection, in the event of a default by debtor
While this arrangements means the organisation receives less than if it had chased the debtor itself for the full amount due, the attractions are clear. the organisation gets cash promptly, allowing it to pay its suppliers and providing working capital to continue its business activities. It neither wastes time on the analysis of the creditworthiness of its customers nor engages in the time-consuming task of chasing payments. These tasks are left to the factoring house, which specialises in these matters and gains a fee for tis intervention
Note that there are two forms of factoring - recourse and non-recourse factoring. With recourse factoring, the factoring house will come back to the organisation in the event of non-payment by the debtor is completely transferred to the factoring house. Unsurprisingly, therefore, the fees for non-recourse factoring are higher than for recourse factoring.
Bank overdrafts and bank facility finances
Overdrafts
may be the only finance option available
good for temporary cash flow
certain terms of agreement such as size, fees etc.
Bank facility finance
major source of funds, particularly for organisation 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 raising long-term finance through the issuance of bonds and other securties. They are the longterm partner of the money markets. Credit ratings are the org. creditworthiness
"bilateral finance" - borrower raises funds or establishes the right to draw on a banking facility from one bank.
financing might be syndicated where a number of banks have a share in the faciltym with the borrower drawing funds from each - an arrangement which means that the credit risk to the lending banks is shared.
Interest rate charged by the arranger of syndicate - usually linked to prevailling 3 month money market rate known as 3-month LIBOR, with the banks adding a margin to LIBOR when lending under the facility. (LIBOR = london interbank offering rate)
Lease finance
lkease finance - leasing but asking the bank to acquire it rather than directly.
end of lease can buy it or replace
Figure 1 / Page 165 - The leasing process
attractive as lessor retains ownership and has the security if lessee doesn't pay. but allows a company without money toget the equipent they require.
leasing has many risks - woolworths example
Equity Finance
Private and public companies can issue shares
dividends can be renvested in growth
Shares may be Ordinary or Preference shares
Ordinary shares - give shareholder ownership of company and entitlement to shar profits (after creditors etc). Have voting right but not automatically entitled to dividend earnings
Prefernce shares - ownership of company, rate of dividend is usually fixed, payable before ordinarly share dividend can be paid. most are cumulative, all back payment have to be paid before an ordinary is paid. only have voting rights in major issues affecting company
Share warrants - gives right not obligation to obtain share at strike price
Ahares have nominal value (or par value) and a market values. Nominal is face value of a security being the amount of principal an issuer will pay to the inverstor on its maturity date. . minimal price too be issued.
LSE
Venture capital and private equity
venture capital companies are suppliers of private equity
these companies allow the other companies to enlist on the London stock market
Hedge Funds - fund management companies that adaopt in investement and strading strategies
benefit to investers is higher return than those on stock market
Angels