Financing a business OHT 12 1 OBJECTIVES You

Financing a business OHT 12. 1 OBJECTIVES You should be able to: Identify the main sources of finance available to a business and explain the advantages and disadvantages of each source Explain the role and nature of the Stock Exchange Discuss the ways in which smaller businesses may seek to raise finance Outline the ways in which share capital may be issued © Pearson Education Limited 2003 Atrill, Mc. Laney: Accounting and Finance for Non-Specialists, 4 th edition

OHT 12. 2 The major sources of external finance Loans/ debentures Ordinary shares Longterm Preference shares Leases Total finance Debt collecting Bank overdraft Shortterm © Pearson Education Limited 2003 Invoice discounting Atrill, Mc. Laney: Accounting and Finance for Non-Specialists, 4 th edition

OHT 12. 3 The risk/return characteristics of long-term capital Ordinary shares Preference shares Loan capital Return Risk © Pearson Education Limited 2003 Atrill, Mc. Laney: Accounting and Finance for Non-Specialists, 4 th edition

OHT 12. 4 Capital issues of UK Stock Exchange listed businesses, 1991– 2000 £m 2200 0 2000 0 1800 0 1600 0 1400 0 12000 1000 0 800 0 600 0 400 0 200 0 0 199 1 Loan capital Ordinary shares Preference shares 199 2 199 3 199 4 1995 1996 1997 1998 1999 200 0 Source: Copyright © 2001 Crown Copyright material is reproduced with the permission of the Controller of HMSO © Pearson Education Limited 2003 Atrill, Mc. Laney: Accounting and Finance for Non-Specialists, 4 th edition

OHT 12. 5 Loan covenants May deal with such matters as: Access to financial statements Other loans Dividend payments Liquidity © Pearson Education Limited 2003 Atrill, Mc. Laney: Accounting and Finance for Non-Specialists, 4 th edition

OHT 12. 6 Finance leases Advantages Ease of borrowing Cost Flexibility Cash flows © Pearson Education Limited 2003 Atrill, Mc. Laney: Accounting and Finance for Non-Specialists, 4 th edition

Finance leases 1997– 2001 OHT 12. 7 £m 1000 0 9000 9349 8000 7692 6000 6837 6929 6884 1999 2000 2001 5000 4000 3000 2000 44 8 1000 0 1997 1998 Source: Adapted from information kindly provided by the Finance & Leasing Association (www. fla. org. uk). Copyright © 2001 Finance & Leasing Association © Pearson Education Limited 2003 Atrill, Mc. Laney: Accounting and Finance for Non-Specialists, 4 th edition

The factoring process OHT 12. 8 Client business Pays 20% balance to client (less fees) when credit customer pays amount owing (5) Goods supplied on credit (1) Factor pays 80% to client immediately (3) Factor invoices credit customer (2) Credit customer Customer pays amount owing to factor (4) Factor © Pearson Education Limited 2003 Atrill, Mc. Laney: Accounting and Finance for Non-Specialists, 4 th edition

Turnover £ 000 m OHT 12. 9 Turnover for invoice discounting and factoring 1997– 2001 70 Invoice discounting 60 Domestic factoring 50 40 30 20 10 0 1997 1998 1999 2000 2001 Year Source: Adapted from information published by the Factors & Discounters Association (www. factors. org. uk). Copyright © 2002 Factors & Discounters Association © Pearson Education Limited 2003 Atrill, Mc. Laney: Accounting and Finance for Non-Specialists, 4 th edition

OHT 12. 10 Long-term versus short-term borrowing There are many issues that should be taken into account. These include: Matching Flexibility Refunding risk Interest rates © Pearson Education Limited 2003 Atrill, Mc. Laney: Accounting and Finance for Non-Specialists, 4 th edition

OHT 12. 11 Total funds (£) Short-term and long-term financing requirements Short-term finance Fluctuating current assets Permanent current assets Long-term finance Fixed assets Time © Pearson Education Limited 2003 Atrill, Mc. Laney: Accounting and Finance for Non-Specialists, 4 th edition

OHT 12. 12 Major internal sources of finance Short-term Long-term Reduced stock levels Delayed payment to creditors Retained profits Total internal finance Tighter credit control © Pearson Education Limited 2003 Atrill, Mc. Laney: Accounting and Finance for Non-Specialists, 4 th edition

OHT 12. 13 Providing long-term finance for the small business Venture capital Business angels Government assistance © Pearson Education Limited 2003 Atrill, Mc. Laney: Accounting and Finance for Non-Specialists, 4 th edition

3 i plc investments 1998– 2002 OHT 12. 14 £m 260 0 240 0 220 0 2000 2536 213 5 1800 1000 800 664 600 400 541 501 200 194 0 Start-ups Growth capital Management buy-ins Management Share buy-outs purchases Recoveries Source: Adapted and reprinted with the kind permission of 3 i Group plc, Copyright © 2002 3 i Group © Pearson Education Limited 2003 Atrill, Mc. Laney: Accounting and Finance for Non-Specialists, 4 th edition

OHT 12. 15 Share issues The most common methods of share issues for cash are as follows: Rights issues Offers for sale and public issues Private placing © Pearson Education Limited 2003 Atrill, Mc. Laney: Accounting and Finance for Non-Specialists, 4 th edition