Sources of Finance
Week 2
Sources of Finance
1) Introduction
It was explained in week 1 that this week’s lectures will focus primarily on institutions that provide finance. Finance has been defined by Chadwick and Kirkby (1995, p 38) in their book Financial Management (first edition, publisher Routledge) as a “system of costs and risks”. As we will see throughout the course, the notion of risk from an investor’s point of view is related to whether there is the accrual of the financial returns that are anticipated from the investment. The inversion of this from a company’s point of view is whether that company will be able to meet any costs associated with acquiring investment funds from an investor. To maximise its chances of doing so, a company is, thus, likely to want to minimise both the costs of finance and any obligations that are associated with acquiring those funds. Yet for companies to function, they will require some long-term finance to be invested. It is possible to sub-divide the sources of long-term finance available to a company into internal sources, external sources that carry few or no financial liabilities and external sources that carry financial liabilities. Internal sources of finance include investment of retained profits, surplus current assets and underutilized fixed assets. These methods carry few if any direct new financial obligations and risks. Grants – as distinct from loans – from governmental bodies are the main external source of funds that carry few if any financial liabilities.
The main sources of finance for many companies are external sources of funds that carry financial liabilities. These may be sub-divided into two. Firstly, there are non-marketable debt such as bank loans and marketable debt such as corporate bonds. All other things being equal, debt finance should be cheaper for a corporation than the other main form of long-term finance, equity. This is because debt finances tends to come with a definite obligation that
Sources of Finance
1) Introduction
It was explained in week 1 that this week’s lectures will focus primarily on institutions that provide finance. Finance has been defined by Chadwick and Kirkby (1995, p 38) in their book Financial Management (first edition, publisher Routledge) as a “system of costs and risks”. As we will see throughout the course, the notion of risk from an investor’s point of view is related to whether there is the accrual of the financial returns that are anticipated from the investment. The inversion of this from a company’s point of view is whether that company will be able to meet any costs associated with acquiring investment funds from an investor. To maximise its chances of doing so, a company is, thus, likely to want to minimise both the costs of finance and any obligations that are associated with acquiring those funds. Yet for companies to function, they will require some long-term finance to be invested. It is possible to sub-divide the sources of long-term finance available to a company into internal sources, external sources that carry few or no financial liabilities and external sources that carry financial liabilities. Internal sources of finance include investment of retained profits, surplus current assets and underutilized fixed assets. These methods carry few if any direct new financial obligations and risks. Grants – as distinct from loans – from governmental bodies are the main external source of funds that carry few if any financial liabilities.
The main sources of finance for many companies are external sources of funds that carry financial liabilities. These may be sub-divided into two. Firstly, there are non-marketable debt such as bank loans and marketable debt such as corporate bonds. All other things being equal, debt finance should be cheaper for a corporation than the other main form of long-term finance, equity. This is because debt finances tends to come with a definite obligation that