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Reading 16: Raising Finance - Small and Medium-Sized Organisations -…
Reading 16: Raising Finance - Small and Medium-Sized Organisations
FINANCING THROUGH RETAINED EARNINGS AND WORKING CAPITAL MANAGEMENT
working capital comprises the resources organisations have at their disposal as a result of the day-to-day running of their business.
new organisations may see no or limited profitability due to the burden of start-up costs
small businesses have limited working capital
organisations may manage their cash flows with the intention of using them to provide liquidity by operating with 'negative working capital'
smaller organisations are less likely to have bargaining power
with working capital, account needs to be taken of how delayed payments to creditors may result in price discounts on supplies being forfeited
there are legal constraints on the late payment of bills
FINANCING THROUGH DEBT FACTORING
credit exposure reduction and cash flow management
factoring is where an organisation sells its receivables to a third party as a discount
an organisation enters into an agreement with a factoring house
factoring house can trade debts while organisation has reduced its credit exposure to its business customers and improved its cash flow
holds back part of payment to organisation so factoring house has some protection if debtor defaults
the organisation gets cash promptly
no wasted time on the analysis of creditworthiness of its customers
no need to engage in the time-consuming task of chasing payments
two forms of factoring - recourse and non-recourse
recourse factoring - factoring house will come back to the organisation in the event of non-payment by the debtor
non-recourse factoring - the risk of non-payment by the debtor is completely transferred to the factoring house
fees for non-recourse factoring are higher than for recourse factoring
BANK OVERDRAFTS AND BANK FACILITY FINANCES
overdrafts
well suited to the financing of seasonal or other temporary cash flow shortages
represent a further form of working capital management, as they directly impact on the cash immediately available to an organisation
bank facility finance
a major source of funds for organisations that neither have critical size nor credit standing to borrow money from the money and capital markets
bilateral facility
borrower raises funds or establishes the right to draw on a banking facility from one bank
syndicated facility
a number of banks have a share in the facility, with the borrower drawing funds from each
3-month LIBOR (London Interbank Offering Rate)with the bank(s) adding a margin
committed
provided the organisation is complying with the terms of the facility agreement, funds may be drawn down when required
uncommitted
bank has no obligation to provide funds when required and would choose to avoid doing so if economic conditions and/or the organisation's circumstances at the time of the request made lending unattractive to them
LEASE FINANCE
where an organisation arranges for a bank to acquire an asset that it needs and then leases it from the bank for a defined term
bank is the lessor, organisation is the lessee
at the end of the term, the lessee can make a final payment to secure ownership of the asset
organisation may want to lease a new asset when the lease ends for the original asset
finance leases
legal ownership of the assets remain with the lesser
all risks and benefits associated with the leased assets are transferred to the lessee
operating leases
typically short-term agreements
lessor retain risks and benefits of leased assets
lessor retains ownership of leased asset and they have security if payments default - secure form of borrowing
beneficial to lessee as payments are manageable with no large sums of money having to be paid outright
EQUITY FINANCE
dividends are the payments to investors in shares
ordinary shares
entitlement to a share of profits of the business only after the creditors ha
have voting rights but no automatic entitlement to dividend earnings
preference shares
rate of dividend is usually fixed
is payable before an ordinary share dividend can be paid
most preference shares are cumulative
shares have nominal value as well as market value
VENTURE CAPITAL AND PRIVATE EQUITY
venture capital companies are suppliers of private equity finance to mew or recently formed companies
private equity relates to non-public issuance of shares
hedge funds are fund management companies that adopt a range of investment and trading strategy
criticism - evidence that they target organisations they perceive to be in difficulties and engage in strategies to profit from a fall in their share prices
a subset of venture capital investors are angel investors
tend to invest in smaller companies at the ve4ry early stages of their life span