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RAISING FINANCE - SMEs (Lease Finance (two forms (finance leases (lessor…
RAISING FINANCE - SMEs
Overview
raising finance to support business operations
typical (but not limited to) forms of finance employed by SMEs (can also be used by large org's)
retained earnings
post tax
undistributed profits
not paid in dividends
not capitalised as additional shares
bonus or scrip issue (secondary offering of shares)
working capital
debt factoring
bank overdraft
bank facilities
leasing
equity finance
venture capital
private equity
Organisation size & finance employed
no strict relationship
Liquidity & Capital
raising finance
provides cash
pay creditors & employees
provides liquidity
provides capital
financial resources
business operations
support growth and development
long term investments
infrastructure
businesses should have a funding strategy
reviews funding options
relative cost & depth of different finance options
contingency planning
should be included in budget & cash flows once agreed
Retained Earnings and Working Capital
Retained earnings
from earlier business activities
working capital
disposal resources from day-to-day business activities
cash @ bank
stock/ inventory
trade receivables (cash from customers)
negative working capital
whats owed to creditors exceeds what is due from trade receivables (customers)
operating in this manner essential means creditors are financing the business
achieving this is dependent on
organisation size relative to customers & creditors
small business have less bargaining power
nature of business
customers paying immediately vs customers paying upon completion
tesco vs house
to work out monetary benefit - consider the average interest cost of finance vs free finance of working capital
risks
can impact price discounts on supplies
damage brand reputation
legal obligations e.g. late penalty charge imposed by UK Government
for start ups - both options may be limited in early years
constrains ability to grow business
Debt Factoring
business sells payable's to 'factoring house' at discount
discount is to total value of receivables
reduces business' credit exposure
improves cash flow promptly
working capital increases
payments to suppliers
continue business activities
no chasing debtors for payment
no time spent on checking credit worthiness of customers
amount advanced & terms vary (can pay up to 90% of debt after charges)
holding back proportion protects factoring house in the event of a default
remaining amount paid if/ when debtor pays factoring house
Negatives
business receives less
two forms
non-recourse
default risk totally transferred to house
high fee charged to business
recourse
house will come back to business in event of non-payment by debtor
Bank Overdrafts & Bank Facility Finances
overdrafts
type of bank loan
good for managing cash flow needs
another form of working capital (direct cash injection)
good for seasonal or temporary cash flow shortages
good for small businesses (may be only option)
negotiation with bank required
terms
fees
size
interest
review period
covenant on financial performance (conditions imposed by lenders on borrowers)
security backing
relative cost to alternatives like factoring should be assessed
facility finances
ability to draw from larger pool of funds from 1 or more banks
bilateral facility
1 bank provides funds
builds good relationships (long term)
future flexibility & quick solutions may be possible
syndicated facility
pools of banks provide funds
credit risk shared among all banks
critical source of funds for businesses lacking size and credit rating
money borrowed from money and capital markets
capital markets
raise long term finance via issuing bonds and other securities
money markets
short term
interest charge
3-month LIBOR + banks margin
charge to borrower known as
drawn fee
drawing down funds
two forms
committed
if all terms complied with bank will provide funds as required by the business
uncommitted
bank has no obligation to provide funds
e.g. bad economic conditions or unattractive circumstances
commitment fee also required
paid by borrower - right to borrow under facility when no funds required
Lease Finance
bank requires asset which business needs
they lease it to business for defined period
after term they can make final payment to secure asset
or ask to lease a modern version, thereby entering into new lease
lessor = bank
lessee = business
two forms
finance leases
lessor owns the asset
benefits & risks transferred to lessee
operating leases
typically short term
lessor retains risks & benefits of asset
benefits
mutual benefits
lessor retaining ownership provides security in event of lessee defaulting
form of secured borrowing
cash flow benefits for lessee
no large upfront sums
manageable payments long term
helps if credit history limited or poor
risks can be high for lessee
Equity Finance
issuance of shares by public or private companies to finance operations
share investors expect blended returns
dividends
div yield = div/ prevailing share price
paid once or twice a year
is dependent on company financial performance
is at discretion of company, subject to shareholder approval
capital growth
increase of share price over time
two main forms of shares issued
ordinary
shareholders have ownership of company
entitled to share of profits (after creditors)
have voting rights
no automatic entitlement to dividend earnings
come after preference shareholders (for dividends)
preference
own company
fixed rate dividend
cumulative dividend payments (overdue payments are provided to them first)
voting rights for major issues only
share warrants
options to holder the right but not obligation to obtain shares at defined price 'strike price'
Value of shares
Par/ nominal
face value
minimum price that it may be issued
expressed as £100 or £1000
record keeping
above par/ nominal
recorded as
share premium
on balance sheet and segregated to share premium account
market
price they will be bought/ sold in the market
trading of shares creates movements in prices
diff in bid-off spread
small for large companies (more trade)
bigger for smaller companies (less trade)
can vary country to country
Venture Capital & Private Equity
venture capital companies
target group of new private companies who are issuing shares
supply private equity finance to new or recently formed companies
private equity = non public
helps companies avoid floating
e.g. Hedge Funds
fund managers with a range of investment & trading strategies
tend to be risky strategies
limited regulation
charge high fees dependent on performance
target failing companies to profit from a fall in their share price
short selling
agreement to sell shares at defined price on future date
intentions
between transaction & settlement date the market price of share will fall
1 more item...
private equity investment provides higher returns than listed shares to the provider
higher risk
premature companies
higher gearing
angel investors
invest in small business at early stages of inception
usually HNW individuals
individually
syndicate
experienced entrepreneurs
companies can leverage the HNW experience, skills and contacts
benefits
suitable for those without financial track record
available if public equity is not
riskier companies can still borrow
less onerous compliance and corporate governance
time and cost efficiencies
related to public offering management
faster means
less exposure to predatory attacks (take overs)