ClicktoeditMastertitlestyleClicktoeditMastersubtitlestyle*1Unit 9 Raising FinanceLearning Objectives:Learning Objectives: ToidentifyandunderstandfinanceandToidentifyandunderstandfinanceandfinance-raising.finance-raising. TodemonstratethetypesandsourcesofTodemonstratethetypesandsourcesoffinance.finance. TograspthemethodsandskillsofraisingTograspthemethodsandskillsofraisingfinance.finance.“Moneymakesmoney,andthemoneyitmakes,makesmoremoney.”“Youcandonothingwithoutmoney.”Where can you find money? How should you manage it?Why raising finance?To meet needs of a growing business To finance an MBI or MBO Type Description ExampleDebtfinanceFinanceisrepaidwithinterestoveraspecifiedperiodoftime.Noownershipofyourcompanybylender.BankFinanceEquityfinanceExchangeofmoneyinreturnforanownershipstakeinyourcompany.Stock,VentureCapitalfundingType of finance required Remember !Akeyconsiderationinchoosingthesourceofnewbusinessfinanceistostrikeabalancebetweenequityanddebttoensurethefundingstructuresuitsthebusiness.(anoptimizationofcapitalstructure)Sources of financeLong termLoans Bonds Stocks Retained earnings depreciationBondsActuallyanIOUAwrittencontractwhichstipulatestheparvalue,thematuritydate(usually10to30years)andtheinterest(paidquarterly,semi-annuallyorannually)rate.Preference Shares (preferred stock)nFixed dividendnCallable: (can be called back) nThe first to be paidnCumulative feature: (dividend must be accumulated and eventually paid in financial difficulty.)nParticipating feature: (be entitled to additional dividends if the company is financially doing well.)nNo voting rights Ordinary Shares (common stock)Cannotberecalled.Votingandelectionrights.Thelasttopaydividends.Thelasttoclaimassetsinliquidation.Short termBank loansOverdraft facilitiesTrade creditFactoringLeasingBank loans-necessityofpayinginterestonthepayment,repaymentperiodsfrom1yearupwardsbutgenerallynolongerthan5or10yearsatmostSecuredloans:co-signerscollateralsUnsecuredloansOverdraft facilitiestherighttobeabletowithdrawfundsyoudonotcurrentlyhaveProvidesflexibilityforafirmInterestonlypaidontheamountoverdrawnTrade creditAnagreementwherebythesellerprovidesgoodsorservicestothebuyerwithoutaskingthelatterforimmediatecashpayment.Carefulmanagementoftradecreditcanhelpeasecashflowusuallybetween28and90daystopay3types:openaccount,promissorynote,draftFactoring thesaleofdebttoaspecialistfirmwhosecurespaymentandchargesacommissionfortheservice.Factorsarecollectionagentswhobuyaccountsreceivableundertheirfacevaluefromfirmswhoareinneedofcash.Qualityofthereceivables,costandtimeofcollectionshouldbeconsideredbyfactors.Negotiating with finance providerWhetherequityinvestorstakeaseatontheboardVotesascribedtoequityinvestorsLevelofwarrantiesandindemnitiesprovidedbythedirectorsFinanciersfeesandcostsWhobearscostsofduediligence.Costs associated with raising financestampdutycapitaldutylegal,professionalandmanagementfeesnegotiationandcommitmentfeesonbankborrowingandVentureCapitalinvestment.TermsRaising finance:obtainingmoneythroughborrowingofdifferentkinds.(evenissuingsharesinyourcompanyisaformofborrowing:thecompanyisineffectborrowingmoneyfromshareholders.)Loan shark:someonewholendsmoneyatveryhighratesofinteresttopeoplewhoarentabletoborrowfrombanks,andmaythreatenviolenceifitisnotrepaid.Trusts: puttingmoneyintofinancialinstitutionsthatinvestinothercompanies,knownasmutual funds intheUS.Cash cow:thepartofabusinessyoucanalwaysdependontomakeenoughprofit.ISA:IndividualSavingsAccount(atax-freesavingsplan)Business angels: privateinvestorslookingfornewstart-upstoinvestin.Theyprovideyouwithseedcapitaltosetupyourbusiness.IPO:initialpublicoffering:yourcompanyisfloatedandyouissuesharesonastockmarketforthefirsttime.Float: toestablishacompanybysellingshares.Blue chips: anindustrialsharethatisexpensiveandinwhichpeoplehaveconfidence.