Sources of finance are divided into 2 main kinds depend on the length of the sources and the amount of money: Long term and short term sources
I. Long term sources of finance:
Share is a part ownership of a public limited company (PLC). When the company need cash it can issue shares and sell to public. People who buy shares are the shareholder of the company. There are 2 kind of share: ordinary share and reference share.
a. Ordinary share: the nominal value of the ordinary shares is the issue value of the share. They don’t have fix interest rate. Their value is determined in the stock market
-It is a cheap and fast way to raise the big amount of money.
-Spread the risk of the company to the other people (shareholders).
-The ordinary shareholders have the right to vote in general meeting of the company -( share control of the company
-The company might issue new shares to the shareholders of another company, in order to take it over.
-Dividend payments are not tax deductible for the company.
b. Preference shares: similar to bond. The dividend rate of the preference share usually low but fix and the company have to pay their dividend before paying dividend of common shares.
-The preference shareholders do not have the right to vote in general meeting of the company.
- The company do not have to pay dividend to shareholders in a year that profits are low.
- Issuing preference shares do not need to be secured on assets of the company. So it does not restrict the company’s borrowing power.
-The company has to pay dividend to shareholders and do not get tax deduction.
-The interest rate of preference shares needs to be high to attract the investors.
Debenture is a form of long-term loan. A PLC can issue debenture to raise a large amount of money. Debentures are often redeemable after a term of ten year or more, even up to 25 years. Debentures are usually secured by assets of the company.
- Cost of this source is low because the interest rate of debentures are low.
-Most debentures have an earliest and latest redemption date, and the company can choose the date to redeem the debentures.
-Debenture is secured by assets of the company so it affect borrowing ability of the company with other sources.
3. Venture capital
Venture capital is becoming an increasingly important source of finance for growing companies. A businessman starting up a new business will invest venture capital of his own, but he will probably need extra funding from a source other than his own pocket. Venture capitalists are groups of (generally very wealthy) individuals or companies specifically set up to invest in developing companies. Venture capitalists are on the look out for companies with potential. They are prepared to offer capital (money) to help the business grow.
The company look for venture capital when the project may be seen as high risk that banks may not want to invest on. But there is also the prospect of very high profit on the project.
-The main advantage of venture capital is that they allow entrepreneurs to build their company with other people’s money (OPM). If you need financing...