SOURCES OF FINANCE

BUSINESS GROWTH - START UP CAPITAL ON THE LEFT, ONGOING FINANCING NEEDS ON THE RIGHT……

VENTURE CAPITAL

-Usually pooling of capital in the form of limited companies – Venture Capital Companies -Looking for investment opportunities in fast growing businesses or businesses with highly rated prospects -May also provide advice, contacts and experience

BUSINESS ANGELS

Individuals looking for investment opportunities Generally small sums up to $150,000 Could be an individual or a small group Generally have some say in the running of the company

TWO VIEWPOINTS TO LOOK AT: FROM POINT OF VIEW OF AN INVESTOR FROM POINT OF VIEW OF THE COMPANY NOW, ONGOING FINANCING NEEDS, DEBT OR EQUITY?

EQUITY VS. DEBT FROM STANDPOINT OF THE COMPANY WHO NEEDS THE $$ Equity is more expensive – YOU HAVE TO GIVE UP OWNERSHIP OF THE COMPANY! s Dilution  …and also pay owners dividends, and expensive and lose control perhaps Debt – Just pay the interest rate, and pay all the money back and you have achieved cheaper financing! But you are in trouble if you cannot pay the money back (lose the collateral or lose your business!)

EQUITY VS. DEBT FROM STANDPOINT OF INVESTOR World of finance runs on the risk/reward principle Higher risk = higher possible return but higher possible loss Venture capital, Business Angels, any equity (owners of shares of public limited companies) Lower risk is to buy debentures, or loan money, you get a lower return but have a much, much better chance to get all your money back

LONG TERM (DEBT) Loans (Represent creditors to the company – not owners) Debentures OR Bonds – fixed rate of return, first to be paid, for example 5.5% IBM Debentures due July 2016 Bank loans and mortgages – suitable for small to medium sized firms where property or some other asset acts as security for the loan 10-year loan from BCP to Cencosud for constructing 10 new Metro markets in Ate/Vitarte

SHORT TERM DEBT (INTRO TO WORKING CAPITAL) Bank loans – necessity of paying interest on the payment, repayment periods from 1 year upwards but generally no longer than 5 or 10 years at most Overdraft facilities – the right to be able to withdraw funds you do not currently have Provides flexibility for a firm Interest only paid on the amount overdrawn Overdraft limit – the maximum amount allowed to be drawn - the firm does not have to use all of this limit Trade credit – Careful management of trade credit can help ease cash flow – usually between 28 and 90 days to pay Factoring – the sale of debt to a specialist firm who secures payment and charges a commission for the service. Leasing – provides the opportunity to secure the use of capital without ownership – effectively a hire agreement

EQUITY (LONG TERM) Shares (Shareholders are part owners of a company) Ordinary Shares (Equities): Ordinary shareholders have voting rights Dividend can vary Last to be paid back in event of collapse Share price varies with trade on stock exchange Preference Shares: Paid before ordinary shareholders Fixed rate of return Cumulative preference shareholders – have right to dividend carried over to next year in event of non-payment Rights Issue – existing shareholders given right to buy new shares at discounted rate (better in some cases to not have to look for new shareholders)

ANOTHER WAY - INORGANIC GROWTH Acquisitions The necessity of financing external inorganic growth Merger: firms agree to join together – both may retain some form of identity Takeover: One firm secures control of the other, the firm taken over may lose its identity Safeway – subject to a £3 billion takeover by Morrisons. Securing the £3 billion necessary is a specialist job.

REVIEW Start up capital? Factoring? Leasing? Hire purchase? Long term loans? Long term bonds or debentures?