1. 3.1 Sources of Financing
Chapter 18
Part 2

2. Evaluation of Internal Financing
No direct cost to the business
Does not increase the debt of the company
No risk of loss of control of the company to another party
No shares are sold to others
New or unprofitable companies have few assets to sell to raise cash
Growth will be constrained by limited cash resources

3. Loans VS Leasing Hire Purchase (A LOAN) Leasing
Purchasing an asset over a period of time
Example: buying car or equipment using loan
Ownership
Leasing
A contract with a company to pay a fee but not actually acquire ownership of the item.
Example: leasing a car, or equipment No Ownership

4. Debentures Debentures (Corporate Bonds)
Bonds issued by a company to raise money and they are usually issued with a fixed rate of interest
Savings Interest Rate to 1% Interest
15% Interest to businesses
Bank makes 14% Profit
10% Interest to People
People make 10% Interest vs 1% at the bank – 9% increase
Business SAVES 5% on Loan Interest by NOT using the bank

5. Sales of Shares of Stock
Corporations may sell additional shares of stock.
Privately held corporations may sell additional shares of stock to their current stockholders. This does not introduce new owners & is called a Rights Issue.
Rights Issue
Existing shareholders have the right to purchase more stock at a discount in order to raise capital for the business.

6. Sales of Shares of Stock
Can sell shares of stock to the wider public by “going public”
Can raise substantial sums of money but introduces new shareholders.
AIM – Alternative Investment Market
A London based stock exchange designed to allow limited stock offerings to raise limited amounts of capital.
Full Stock Exchange Listing
Public Issue by Prospectus – advertises the business’s stock for sale on the stock market. This is an expensive undertaking.

7. Evaluation of External Financing Debt VS Equity Financing
Debt Financing
No shares are sold so ownership does not change or become diluted with additional shares of stock
Loans and bonds will be repaid – so this is not permanent
Lenders have not voting rights
Interest on loans is paid before taxes / Dividends are paid after taxes are paid on profits
Additional costs of interest payments
Equity Financing
Never has to be repaid
Dividends do not have to paid to stockholders
Ownership diluted by selling more shares of stock

8. Other Sources of Financing
Grants
Government agencies willing to fund businesses that will establish themselves in particular locations or create jobs.
Economic Development Funds

9. Other Sources of Funding
Venture Capital
Capital invested in business start-ups or expanding small businesses that have good profit potential but cannot find funding from other more traditional sources.
Shark Tank: (7 minutes)
Shark Tank Episode

10. Financing Options Sole Traders & Partnerships VS Corporations
Cannot raise money with sale of stock
Unlikely to be able to issue a bond
They CAN
Bank Overdrafts (credit lines)
Loans
Trade Credit (credit from suppliers)
Bank loans will be limited unless personally guaranteed by the owners personal assets.

11. Micro Finance
Provides small capital investments (loans - $20) to impoverished entrepreneurs with no other means to access financing for their small businesses.

12. Recap Internal Sources of Finance External Retained Profits
Sale of Assets
Reductions in Working Capital
Internal
Share Issue (Sale of Stock) Debentures (Bonds) Loans Grants
Sources of Finance
(limited companies)
Long Term
Leasing Hire Purchase Loans
Medium Term
External
Bank Overdraft (credit Lines) Bank Loan Creditors Debt Factoring (Selling A/R)
Short Term

13. Factors that Influence Financing Choices
What is financing needed for which affects the time period required to finance
Cost
Amount required
Legal business structure and desire to retain control
Size of existing borrowing
Variable needs (seasonal sales)