Sources of Finance

8 Key excerpts on "Sources of Finance"

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  eBook - ePub

  Financial Accounting (RLE Accounting)

  An Introduction

  • John Blake(Author)
  • 2013(Publication Date)
  • Routledge

    (Publisher)

  8

  Sources of Finance

       

  Objectives

  This chapter has two broad objectives:

  1

  To give an introduction to the various Sources of Finance shown in a business balance sheet, explaining their significance and how they are accounted for.

  2

  To introduce the major factors taken into account in deciding how to raise finance for the establishment, running, and expansion, of a business.

  Specifically we consider

  1

  The ways in which new shares can be issued.

  2

  Retained profits as a source of finance.

  3

  Forms of long-term borrowing.

  4

  Types of short-term borrowing.

  5

  The nature of the tax liabilities shown in the balance sheet.

  6

  Sources of Finance which do not appear in the balance sheet.

  7

  The effect of the financial structure on fluctuations in profit (gearing).

  8

  The relationship between the trading structure and the financial structure.

  9

  The factors taken into account in choosing between Sources of Finance.

  Raising funds from share issues

  One of the sources from which a new company will derive funds will be from the issue of shares in the business. If additional finance is required during a company's life an issue of new shares is one way of raising finance that might be considered. In this respect a private company, which is not permitted to issue any form of security to the public, is at a severe disadvantage compared to a public company. A public company will normally only be able to benefit from the legal permission to issue securities to the public if it is listed

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  eBook - ePub

  Finance Director's Handbook

  • Glynis D Morris, Sonia McKay, Andrea Oates(Authors)
  • 2009(Publication Date)
  • CIMA Publishing

    (Publisher)

  Chapter 24. Sources of Finance

  24.1. The Search for Finance

  At a Glance

  ■ The business development giving rise to the need for additional funding will often indicate the most appropriate source of finance. ■ Grant funding should always be considered, but this is unlikely to meet the full cost of any project. ■ It is generally unwise to attempt to finance major purchases or business development from a bank overdraft. ■ Any application for finance will need to demonstrate the credit-worthiness and viability of the business to the potential financier. ■ Issues such as overall cost, flexibility and level of security required will all need to be taken into account in deciding on the best option.

  24.2. P lanning the S earch

  Sound business structures and operations need to be financed properly, and there will come a time in the life of every business when additional funds are needed, either to purchase fixed assets, to fund a particular initiative or development within the business or to enable the strategic plan for the business to be put into place. The business development giving rise to the need for funding will usually indicate the most appropriate source of finance, and the term of the finance should generally be matched as far as possible with the life of the asset or project. Grant funding should always be considered, although this is unlikely to meet the full cost of any project; thus, the business will usually need to raise some funds from other sources as well. Some form of loan finance, including options such as leasing, will usually be the most appropriate method of funding asset purchases, whereas funding from other investors may be needed to finance the longer-term development of the business. It is generally unwise to attempt to finance major purchases or business development from a bank overdraft – the rate of interest will usually be unacceptably high and overdrafts are repayable on demand, allowing the bank to withdraw the facility at any time if it was unsatisfied with the progress or management of the business.

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  eBook - ePub

  Creating a Thriving Business

  How to Build an Immensely Profitable Business in 7 Easy Steps

  • George Horrigan(Author)
  • 2012(Publication Date)
  • Morgan James Publishing

    (Publisher)

  Lastly, separate the ownership of your building or other assets (i.e., a fleet of trucks) from the funding of your operational business. This is because the financing of an asset is relatively straightforward and is not a strategic action; however, anything involving the funding of your business operation is strategic.

  Complete exercise 8-6 in workbook

  SOURCES OF FINANCING

  Where can you obtain funding for your business? There are a large number of options but they basically fall into two categories: Owner financing (you fund the business yourself) and outside financing (others fund your business). Here is a checklist for each:

  Owner Financing

  • Personal funds that you as an owner put into your business —This may come from your checking account, savings account, or investments.

  • Refinancing your house —Refinancing your residence for an amount greater than its current mortgage and placing the additional amount into your business.

  • Home equity loans —Taking out a home equity loan or a home equity line of credit on real estate that you own.

  • Second mortgage —Borrowing on your personal residence by taking out a second mortgage.

  • Loans on other assets

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  eBook - ePub

  The Professional Practice of Landscape Architecture

  A Complete Guide to Starting and Running Your Own Firm

  • Walter Rogers(Author)
  • 2010(Publication Date)
  • Wiley

    (Publisher)

  The purpose of the funds often determines the type of financing the firm selects. If the need for the funding is not immediate and if the amount of the funds that are needed can be covered by the firm’s current profits, the firm may be able to wait until accounts are received to fund the need. If the need is immediate, such as making a payroll or a tax deposit, the firm will need access to a short-term credit source if it is available. If the need is for capital equipment, the firm will want to know when the equipment is needed and plan ahead to obtain a long-term note if savings or retained earnings or another liquid form of funding is not available. If the firm needs the funds for operating materials, the firm may have a readily available source of funds by relying on trade credit.

  Determining what form of financing will be used depends upon the equity, or retained earnings, in the firm, the financial health of the firm and its owners, and the amount of debt already incurred by the firm. Short-term money needs are usually funded by the profits and equity in the firm. Immediate short-term needs also can be funded by an operating line of credit or a revolving line of credit for which creditors usually require payment in the near future. Long-term funds used for equipment and real estate funding are almost always provided from loan capital.

  Start-up financing decisions are influenced by the form of the business. Sole proprietors and partnerships may be financed initially by personal contributions of funds, loans, venture capital from a silent partner, or bringing in another owner or partner. Corporations have the legal ability to raise funds by selling stock either to members of the firm or to outside investors. Large corporations that have the possibility of revenue growth may consider selling stock to the general public to raise funds. Investors buy the stock because they believe the firm has the potential to provide them with a good return on their investment. There are a number of large multidisciplinary firms listed on stock exchanges such as the New York Stock Exchange, including the giant firm AECOM. A landscape architect working for a publicly traded firm like AECOM will know the stock value on a daily basis by going to the stock price listings in the stock market indexes published in newspapers and online.

  Once the firm has an established operating and credit track record, the sources of financing will vary. Private financing from friends or family is one of the first sources to explore when the need for capital arises. Financial institutions, banks, private investors, and governments are other sources. Leasing is a popular funding method for equipment and vehicles. Selling stock to members of the firm or the public raises funds but dilutes the ownership of the firm at the same time. Government-sponsored tax relief and incentive programs are often overlooked as a source of financing. The landscape architecture firm’s analysis of all sources of financing should always include such programs (Bates 1982).

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  eBook - ePub

  Global Entrepreneurship

  Environment and Strategy

  • Nir Kshetri(Author)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  Chapter 3  

  Sources of Entrepreneurial Finances and Their Variation across the World

    This chapter’s objectives include:

  1. To demonstrate an understanding of various types of entrepreneurial financing.
  2. To analyze international variations and their sources in the availability of funds as well as types of funds to meet financial needs of potential and existing entrepreneurial ventures.
  3. To evaluate the impacts of disruptive economic events such as the 2008 global financial crisis and IT bubble burst on the availability of various types of entrepreneurial finances.
  4. To assess the effects of microfinance on the entrepreneurial activities of the poorest people in developing economies.
  5. To demonstrate an understanding of motivations of investors associated with various forms of entrepreneurial financing.
  6. To assess the appropriateness of various sources of financing for entrepreneurs with different levels of needs and different phases of business operations.
  7. To demonstrate an understanding of some of the recent innovations in entrepreneurial financing such as crowdfunding.

  Introduction

  Not everyone who wants to start a business venture is able to do so. A lack of access to capital is often the biggest roadblock for latent entrepreneurs to materialize the goal of starting their own business. This is true even in advanced economies such as the U.S. A 2017 survey found that 90% of small business owners in the U.S. agreed that credit availability for small businesses is a problem. Over 60% thought that it was harder to get a loan in 2017 than it was in 2008.1

  Economies worldwide vary widely in terms of the availability of funds to meet financial needs of entrepreneurial ventures, types of available funds, and the relative availability of such funds across various phases of ventures. A country’s entrepreneurial finance environment is shaped by diverse motivations of various players such as investors, entrepreneurs, regulatory agencies, and nongovernment organizations.

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  eBook - ePub

  The Portable MBA in Entrepreneurship

  • William D. Bygrave, Andrew Zacharakis(Authors)
  • 2015(Publication Date)
  • Wiley

    (Publisher)

  Entrepreneurs at small, growing firms, unlike finance treasurers at most Fortune 500 companies, do not have easy access to a variety of inexpensive funding sources. In the entire world, only a handful of very large firms have access to funding sources such as asset-backed debt securitizations, A-l commercial paper ratings, and below-prime lending rates. Most financial managers of small- to medium-size firms are constantly concerned about meeting cash flow obligations to suppliers and employees and maintaining solid financial relationships with creditors and shareholders. Their problems are exacerbated by issues concerning growth, control, and survival. Moreover, their difficulty in attracting adequate funds exists even when firms are growing rapidly and bringing in profits (this is explored later in the chapter). However, when financing from external sources such as banks dries up, as it did during the economic recession in 2008 and 2009, the consequences are sometimes fatal for small companies. Entrepreneurs must be efficient with their working capital and keep external capital needs to a minimum; they need to be self-sufficient and grow within their means. Otherwise, they won’t survive.

  This chapter describes various financing options for entrepreneurs and identifies potential financing pitfalls and solutions. It also discusses how these issues are influenced by the type of industry and life cycle of the firm and how management should plan accordingly.

  Getting Access to Funds—Starting with Internal Sources

  Entrepreneurs requiring initial start-up capital, funds used for growth, and working capital generally seek funds from internal sources. This contrasts with managers or owners of large, mature firms that have access to profits from operations as well as funds from external sources. We distinguish internal from external funds because internal funding sources do not require external analysts or investors to independently appraise the worthiness of the capital investments before releasing funds. Moreover, since external investors and lenders do not share the entrepreneur’s vision, they may view the potential risk/return trade-off in a different vein and may demand a relatively certain return on their investment after the firm has an established financial track record.

  Exhibit 8.1

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  Crowdfunding - A successful Way of New Venture Financing?

  • Alexander Pascal Borner(Author)
  • 2016(Publication Date)
  • tredition

    (Publisher)

  Also, the offering of microloans is usually not very attractive, the transaction costs are high, the returns are usually low and usually there is a higher risk than giving loans to non-start-up companies (Martins et al., 2004). However, as well these businesses need a source of money to finance their business, and for exactly this reason there are other possibilities available than the common capital market and one of these solutions could be crowdfunding. Dollinger (2008) names four different factors to decide which types and sources of financing are available to the new venture and the responsible entrepreneur.

  1.	The stage of the business development.
  2.	The type of business and its potential for growth and profitability.
  3.	The type of asset being financed.
  4.	The specific conditions of the financial environment within the company.

  These four factors actually reflecting the already mentioned and explained influenced on the possibilities and chances for a new venture to raise the necessary funds at each stage of its development. Of course, there are as well other influences that have to be taken into consideration, like the overall or general financial environment. There are several different elements of this overall financial environment which have an influence on the possibilities of a startup to raise funds. The first element that is able to name here, are interest rates and their term structures. The interest rates for short-term loans are usually lower than for longterm loans, which makes it more attractive for the new venture to take a series of short-term loans than a long-term loan (Dollinger, 2008). The current situation of the stock market is another factor that influences the behavior of potential investors. If the current situation is a high evaluated and rising stock market, investors are probably willing to accept more risk and to invest more (Dollinger, 2008). If the market is in bad conditions and the general trend is falling, the acceptance of risk is lower and the willingness to invest in risky start-ups is probably lower than in the opposite situation. Especially small firms and start-ups are usually small firms, are suffering under a weak stock market situation (Christofidis, Debande, 2001). Another influence is the health of financial institutions, like commercial banks and international financial institutions. Institutions in a good situation and without financial pressure are more likely to invest than in the situation of pressure (Dollinger, 2008). Especially in the case of new ventures, which are still in a phase of research and development, no proven track record of the business activities and uncertain prospects for the business lead to a high perception of risk for conventional institutions (Christofidis, Debande, 2001). This leads to conservative behavior and the majority of investments will be invested in companies that have a very low risk. According to Dollinger (2008), the level of confidence in the economy and the government monetary and fiscal policy are other important factors of the financial environment which have an influence on the behavior of investors.

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  eBook - ePub

  Entrepreneurial Financial Management

  An Applied Approach

  • Jeffrey R. Cornwall, David O. Vang, Jean M. Hartman(Authors)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  The entrepreneur’s personal assets (such as bank accounts, retirement accounts, and publicly traded stocks) are worth another $150,000, and another $120,000 can be borrowed by pledging these assets. Therefore, between debt financing of $214,000 using the various business assets, and investing personal equity of $120,000 raised from her personal assets, she will have $334,000 of the $380,000 to fund the venture, which leaves $46,000 in equity that needs to be raised to fund the assets of the business. She is reasonably confident that she can go to friends and family for this amount of funding. This example demonstrates the variety of funding sources that can go into the financing plan of a single deal.

  Table 13.1

  Example of Assets and Potential Funding Generated

  Asset	Estimated value	Percent financed	Potential funding generated
  Customer purchase orders	$50,000	70	$35,000
  Accounts receivable (< 60 days)	$80,000	70	$56,000
  Inventory	$20,000	30	$6,000
  Leasehold improvements	$10,000	50	$5,000
  Building	$120,000	70	$84,000
  Undeveloped land	$40,000	40	$16,000
  Equipment	$15,000	80	$12,000
  Total of business funding sources	$335,000	$214,000

  SUMMARY

  This chapter has discussed external debt as a source of funding for entrepreneurial ventures. Sources of short-term debt include trade debt, bank debt, asset-based lenders, and factors. Sources of long-term debt include banks, real estate lenders, and leasing companies. The Small Business Administration can guarantee bank loans for some small business uses. Entrepreneurs must learn to develop a good working relationship with their bankers and create a strategy that can include an array of sources of debt funding. Finally, debt, although used by almost all businesses to some degree, requires prudent and careful planning. The next chapter will examine venture capital equity funding, which is available only for those few ventures that are considered high-growth, high-potential businesses.

  DISCUSSION QUESTIONS

  1.  Discuss the various types of short-term credit. What are the best uses for each type? What should an entrepreneur do to establish each form of short-term credit?

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