Sources of Finance

10 Key excerpts on "Sources of Finance"

• 

  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

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Entrepreneurship

  • William D. Bygrave, Andrew Zacharakis(Authors)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  Getting Access to Funds—Start with Internal Sources Entrepreneurs requiring initial startup capital, funds used for growth, and working capital generally seek funds from internal sources. Managers or owners of large, mature firms, in contrast, have access to profits from operations as well as funds from external sources. This chapter is written by Joel Shulman. 444 CHAPTER 12 Debt and Other Forms of Financing Self-funding Credit cards Family Friends Suppliers Angels Commercial banks Asset-based lenders Institutions Insurance companies Venture capitalists Private equity Public equity Public debt Commercial paper Figure 12.1 Sources of outside funding: Levels of funding and firm maturity 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. External investors and lenders also don’t share the entrepreneur’s vision, so they may view the potential risk/return trade-off in a different vein and demand a relatively certain return on their investment after the firm has an established financial track record. Figure 12.1 shows a listing of funding sources and approximately when a firm would use each. In the embryonic stages of a firm’s existence, as we’ve discussed, much of the funding comes from the entrepreneur’s own pocket, including personal savings accounts, credit cards, home equity lines, and other assets such as personal computers, fax machines, in-home offices, furniture, and automobiles. Soon after entrepreneurs begin tapping their personal fund sources, they may also solicit funds from relatives, friends, and banks. Entrepreneurs would generally prefer to use other people’s money (OPM) rather than their own because if their personal investment turns sour, they still have a nest egg to feed themselves and their families.

  Sign up to read

  Learn more about book
• 

  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.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Entrepreneurship

  • Andrew Zacharakis, William D. Bygrave(Authors)
  • 2019(Publication Date)
  • Wiley

    (Publisher)

  338 The success of Wayfair, the e-commerce home goods reseller, was not only due to their clever target marketing and web analytics, but from a business model that relied upon an efficient cash conversion cycle. Photo Credit: M4OS Photos/Alamy Stock Photo This chapter was written by Joel Shulman. 11 Debt and Other Forms of Financing 339 Getting Access to Funds—Start with Internal Sources 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 hand- ful 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‐sized firms are constantly concerned about meeting cash‐flow obligations to suppliers and employees and maintaining solid financial relationships with creditors and shareholders. Their prob- lems are exacerbated by issues concerning growth, control, and survival. Moreover, the difficulty of attracting adequate funds exists even when firms are growing rapidly and bringing in profits. This chapter describes various financing options for entrepreneurs and identifies potential financing pitfalls and solutions. We also discuss how these issues are influenced by the type of industry and the life cycle of the firm and how to plan accordingly. Getting Access to Funds—Start with Internal Sources Entrepreneurs requiring initial start‐up capital, funds used for growth, and working capital gen- erally seek funds from internal sources. Managers or owners of large, mature firms, in contrast, 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.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Types and Sources of Finance for Start-up and Growing Businesses

  An Instant Guide

  • Guy Rigby(Author)
  • 2011(Publication Date)
  • Harriman House

    (Publisher)

  Types and Sources of Finance for Start-up and Growing Businesses

  “Money often costs too much.” — Ralph Waldo Emerson

  Show me the money

  There is more to life than equity. Businesses will normally have access to a variety of different types and Sources of Finance. The trick is in learning to combine these to create financial stability and maximise shareholder returns.

  It may seem counter-intuitive but, in a successful business, external equity is likely to be the most expensive source of finance. It will ultimately create value for the investor far in excess of that available from deposits or similar investments and will deprive the founder of this value. From the founder’s perspective, this may represent a significant and unwelcome opportunity cost.

  In addition, using equity as a sole means of funding may reduce risk but it will also reduce returns. Take the example of an investor who buys for £100 and sells for £150 – a good return of 50%. Now consider the same situation, but imagine that £75 of the investor’s original investment is borrowed, leaving only £25 as the equity investment. Ignoring the interest cost on the borrowing which, admittedly, is an over simplistic approach, the equity of £25 becomes equity of £75 (i.e. £150 - £75). In this case the investor’s equity return rises to 200%, a far more satisfying result.

  This is known as the gearing or leverage effect, where non-equity funding can be used to boost equity returns.

  In practice, lenders will not make unlimited loans, so the ability to gear the equity with borrowings will be dictated by market conditions and the assets or cash flows available to secure or service them. In addition, businesses that are highly geared (i.e. those with large borrowings in relation to their equity) are more likely to face difficulties in the event of a slowdown in demand or an unexpected loss.

  As always, it’s a question of balance. The equity, which is the fixed capital of the business, needs to be sufficient to support the business after all other factors have been taken into account, with sufficient headroom to weather unexpected storms, should these occur.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Attracting Equity Investors

  Positioning, Preparing, and Presenting the Business Plan

  • Dean A. Shepherd, Evan J. Douglas(Authors)
  • 1998(Publication Date)
  • SAGE Publications, Inc

    (Publisher)

  X I Sources of Early-Stage Financing T he number of new enterprises launched in the United States has grown rapidly from about 1 million in 1981 to 18 million in 1988, and it is estimated to reach 30 million by the year 2000. l These new, 2 small, and expanding firms generate virtually all new jobs. 3 They also generate 50% of all innovations and 95% of all radical innovations. 4 Access to early-stage capital is one of the key contributing factors to new venture survival and growth and, thus, to increased employment and ongoing technological innovation. Raising capital is important to all firms but in particular to new ventures whose growth gives them an amazing appetite for cash. For example, Briazz, a Seattle-based salad and sandwich café chain, required equity capital to fund national expansion. They raised $19 million from a group of investors. The iCat.Corp required and obtained a similar amount of money to maintain their lead in creating software for inter-active internet catalogues. 5 Growing companies like Briazz and iCat.Corp may require a number of infusions of cash to fund their continued growth. On the other hand, Chris, a retired supermarket manager who intends to set up Sail Away, a yacht-charter business on Grand Cayman island in the Caribbean, expects to require only initial funding, inasmuch as operating revenues are expected to exceed operating expenses once he begins operations. Thus, some companies require only an initial infusion of cash and can fund future growth from profits (retained earnings), whereas other 1 2 ATTRACTING EQUITY INVESTORS potential business owners are not seeking growth and seek only the capital necessary to start or purchase the business. DEBT VERSUS EQUITY The two main sources of capital are debt and equity. Debt usually is more difficult to obtain, because new ventures lack a track record of sales and usually also lack collateral to pledge against the loan.

  Sign up to read

  Learn more about book
• 

  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?

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  The Illusions of Entrepreneurship

  The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live By

  • Scott A. Shane(Author)
  • 2008(Publication Date)
  • Yale University Press

    (Publisher)

  Although new businesses are financed from a variety of sources, the most common source of capital is the founder’s savings. The amount of money that founders contribute to their start-ups from their own sav-ings underestimates how much money most entrepreneurs put into their businesses. Many entrepreneurs borrow personally to finance their new businesses, with personal bank loans being the most important source of personal debt for new businesses. Because entrepreneurs typically use their savings to capitalize their new businesses, you might think that some people are prevented from starting businesses because they lack the money to finance them. If you did, you’d be partially right. Receiving a financial windfall increases the odds that a person will start a new business, but wealthier people are no more likely than other people to start businesses, except for the part of the richest 10 percent that is starting accounting firms, law firms, and medical practices. There are a lot of reasons why some entrepreneurs get financing from external sources and others don’t. Things like the quality of their business ideas or their talent as entrepreneurs make a difference. But one reason some entrepreneurs get money from others is because they seek it. Of course, not all entrepreneurs who seek external financing get it. There are many reasons why some entrepreneurs get money, while oth-ers don’t, but one of the most basic is that their ventures are older and have undergone more development. Investors use these factors—age How Are New Businesses Financed? 95 and level of development—to screen out ventures that are not worth funding. In contrast to the common view that new firms can’t get business loans, new businesses are financed about half with debt and half with eq-uity. In fact, the most common source of debt for new businesses is com-mercial banks. What most new firms are unable to obtain is equity investment from someone other than a founder of the firm.

  Sign up to read

  Learn more about book
• 

  No longer available |Learn more

  Entrepreneurial Financial Management

  An Applied Approach

  • Jeffrey R. Cornwall, David O. Vang, Jean M. Hartman(Authors)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  The forecasted financial statements developed for Sally Warner’s business show cash flow projections that include both operating cash flow needs and assets that will need to be purchased. She has carefully evaluated these projections and determined there is some room for bootstrapping her venture during start-up. The total financing required is thus determined to be about $380,000, rather than the $500,000 initially estimated.

  Table 13.1Example of Assets and Potential Funding Generated

  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.

  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 SBA 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?
  2. How can entrepreneurs manage their own business’ credit risk?
  3. Discuss the various types of long-term credit. What are the best uses for each type? What should an entrepreneur do to establish each form of long-term credit?

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Advanced Introduction to Entrepreneurial Finance

  • Hans Landström(Author)
  • 2017(Publication Date)
  • Edward Elgar Publishing

    (Publisher)

  Retained earnings are an important source of finance. External finance Limited access to external finance. Access to only a part of the capital market. Banks are usually the only external capital provider. Multiple sources of external finance are available both on national and international levels. THE BASICS OF ENTREPRENEURIAL FINANCE 11 the early stages of venture development. Unless capital providers can make an accurate risk–return evaluation, they will act in a rational way from their perspective and invest in industries and businesses with lower risks and higher expected returns – and as a consequence be reluctant to invest in entrepreneurial ventures (Shane and Stuart, 2002). In this section I will elaborate in more detail on some of the issues raised in the previous section, that is, the reluctance of external capital providers to invest in entrepreneurial ventures. I will argue that this reluctance can be due to four interrelated factors: (1) the uncertainty about the future that characterizes many entrepreneurial ventures; (2) the information asymmetries between the entrepreneur and the capital providers; and as a consequence (3) the agency problems that can arise between the actors; and finally (4) the relatively high search, transac- tion and monitoring costs that arise when providing small amounts of capital. Thus in this section I will elaborate on the basic reasons behind the difficulties experienced by entrepreneurial ventures when trying to acquire external finance. 1.4.1 Main characteristics: uncertainty and information asymmetry Lending money to or investing in an entrepreneurial venture involves a certain degree of risk and even uncertainty. It may concern technologi- cal, market and/or management risks or uncertainties. We also know that new ventures are at higher risk of default than established busi- nesses, and a large proportion of new ventures never experience their own five-year anniversary.

  Sign up to read

  Learn more about book