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Reading 16: Raising finance - small & medium sized organisations -…
Reading 16: Raising finance - small & medium sized organisations
Financing through retained earnings and working capital management
Working capital = the resources organisations have at their disposal as a result of the day-to-day tunning of their business
Negative working capital = outstanding amounts due to creditors, or trade payables exceed those due to be received from customers, the trade receivables
Financing through debt factoring
Debt factoring/factoring is an exercise in both credit exposure reduction and cash flow management employed by many small & medium sized organisations
Factoring is where an organisation sells its accounts receivables to a third party at a discount to the total value of the receivable amounts
Factoring is another way of using working capital management to finance an organisation
Resource factoring = the factoring house will come back to the organisation in the event of non payment by the debtor
Non resource factoring = the risk of non payment by the debtor is completely transferred to the factoring house
Bank overdrafts & bank facility finances
Overdrafts
Represent a further form of working capital management
Involves negotiation with the bank provider
Terms set in respect of; size of overdraft, interest chargeable, whether fees are charged, the review period, covenants on financial performance, notice periods, security provided
Bank facility finance
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
Bank finance can come in the form of bilateral facility, where the borrower raises funds or establishes the right to draw on a banking facility from one bank
Alternatively, financing may be syndicated, where a number of banks have a share in the facility, with the borrower drawing funds from each - credit risk to the lending banks is shared
Committed facility = provided the organisation is complying with the terms of the facility agreement, funds may be drawn down when required
Uncommitted facility = the bank has no obligation to provide funds when required and would choose to avoid doing so if the economic conditions and/or the organisations circumstances at the time of the request made the lending unattractive to them
Lease finance
Leasing is another widely used form of finance for organisations
Involves an organisation arranging 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 org is the lessee
The org makes payments to the bank to repay the loan
The legal ownership of the asset remains with the bank and the benefits and risks associated with the assets sits with the org
Equity finance
Public and private incorporated companies can issue shares in order to finance their operations
Ordinary shares = give the shareholders ownership of the company and entitlement to a share of the profits of the business only after the creditors have been paid. Shareholders have voting rights but no automatic entitlement to dividend earnings
Preference shares = gives shareholders ownership of a company, but the rate of the dividend on preference shares is usually fixed and is payable before an ordinary share dividend can be paid, shareholders usually only have voting rights in the event of a major issue affecting the company
Venture capital & private equity
Venture capital companies are suppliers of private equity finance to new or recently formed companies
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