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Reading 16: Raising finance - small and medium sized organisations -…
Reading 16:
Raising finance - small and medium sized organisations
Retained earnings and working capital management
small organisations
working capital management
recourses at their disposal:
cash
inventory
payables
receivables
negative working capital
Money owed to creditors is higher than its trade receivables
Organisations creditors providing finance to business
Less power to receiving receivables from customers due to small scale of business
Depending on types of business service, depends how quickly customers pay
First years of business
limited profit
no profit due to set up costs
limited room to grow business
Late payment
more vulnerable
reduced liquidity
in uk, legislation gives right to suppliers to claim interest penalty from purchases is payments exceed 30 days
late payment of commercial debts act of 1998, 2000, 2002
Debt factoring
Credit exposure reduction
cash flow management
Selling its receivables to a third party
factoring house
has right to trade the debts
For example pays majority of businesses debt, pays rest when busniess pays the factroing house
business has then improved it's cash flow
Business takes less compared to paying debt themselves, but it allows for quicker cash flow in short term
Bank overdrafts
small businesses more suited
seasonal or other temporary cash flow shortages
Requires negotiation with bank provider:
maximum size of over draft
interest chargeable
fees charged when overdraft is utilised
review period
financial performance
notice period
security provided - e.g. form of property
Bank facility finance
Major source of funds
businesses that have neither the critical size or credit standing to borrow money from the money and capital markets
Long term finance
Credit ratings
Banks have no obligations to provide funds if economic conditions do not look well suited
LIBOR (London Interbank Offering Rate)
Lease finance
organisation arranges for bank to acquire asset that it needs, and lease it from bank for an aggreged period of time
legal onwership remains with lessor (bank)
benefits and risks trandered to lessee
operating lease
Short-term
Lessor retain benefits and risks of leased asset
Lessor benefits
retains ownership
security in event lessee not paying
Lessee benefits
cash flow benefits
More manageable
help small businesses with poor or limited credit history
Provides means to acquire assets needed to support business activities
Equity Finance
Dividends
Payments, annual or half-yearly to investors in shares
size = financial performance
Ordinary shares
provides shareholders ownership
entitlement of share of profit after creditors are paid off
Voting rights
no automatic entitlement
Stand behind preference shareholders
Preference shares
ownership of company
fixed rate
payable before ordinary shareholder
back payments paid before ordinary shareholders
voting only applied in major issues affecting company
Share warrants
provides holder rights to obtain shares at defined price
Nominal value
security
principal value paid to investor on maturity date
Hedge funds
fund management companies that adopt a range of investment and trading strategies
targeted at wealthy individuals who can afford to take greater risks
managers charge high fees
funds adopt higher risker investment
lightly regulated
Private equity- benefits
Too high risk to attract public share offerings for smaller businesses
private ownership means less compliance
raising private capital is faster
less exposure to predatory attacks