The financing of every business is the most fundamental aspect of its management. Get the financing right and the company will have a healthy business, positive cash flows and ultimately a profitable enterprise. The financing can happen at any stage of a business's development. On commencement of your enterprise the business entity will need finance to start up and, later on, finance to expand.
Finance sources may be internal or external but they may also be short, medium or long term.
* Short Term Finance the Business for up to One year.
* Medium Term Finance the business for up to Five years.
* Long Term Finance the business for more than Five years.
A. Long and Medium Term Sources of Finance
1. Ordinary Shares
It is a fixed unit of share capital of a business which is a publicly quoted organisation whose shares are traded on the stock exchange. Ordinary shares yield a dividend on the capital that was invested in the purchase of shares. These dividends represent the proportion of profits made by the business. Moreover they are the owners of the company.
Advantages to the Company:
* the funds can usually be kept indefinitely, no payments are required on the funds (dividends may be paid out but only on earnings) and no collateral is required for equity investment
* Not necessary to give dividend to the ordinary share holders
* The basic disadvantages are that dividend payments are not tax deductible for the corporation.
2. Preference Shares
Preference shares are legally shares, but they are very different from ordinary shares. The economic effect of Preference share is more like that of bonds. Like convertibles, they are regarded as hybrids of debt and equity. Dividends on preference shares have to be paid before dividends on ordinary shares. Dividends on ordinary shares may not be paid unless the fixed dividends on preference shares are paid first. Preference dividends are fixed, so they do... [continues]
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