forms of finance

Topics: Finance, Corporate finance, Debt Pages: 5 (1509 words) Published: December 3, 2013

INTRODUCTION
Companies need to choose from among various sources of finance depending on the amount of capital required and the term for which it is needed. Finance sources can be divided into three categories, namely traditional sources, ownership capital and non-ownership capital. Traditional sources are the internally generated capital (retained earnings); ownership capital is the capital owned by shareholders of the company (ordinary shares) while non-ownership capital includes funds from lenders such as banks and creditors. In view of this report, it is exclusively focused on external financing which is ownership and non-ownership capital.

Long term sources of finance are those that are needed over a longer period of time, usually over a year. The reasons for needing long term finance are generally different to those relating to short term. The major reason for sourcing for long term finance for companies is to be able to carry out its capital intensive projects which in the long run cannot or may not be adequately funded by its retained profits. Most important aspects of any investment from the perspective of both the investor and company are to be able to minimize risk and maximize profit. Investment bankers and corporate finance specialists assist firms in identifying financial needs, evaluating capital structure models and finding interested investors.

Analysis of Key Differences between Gravier Plc And Expo Plc Gravier plc is a public limited liability with an annual turnover of £200million and requires new finance in the total sum of £50million in order to be able to produce using a new plant, materials for road building. Thus, for it to be able to produce these materials, new plants and machinery will be required. On the other hand, Expo plc has an annual turnover of £5million and has a public service customer and requires a new finance worth £8million to relocate from its existing research laboratory to a new location with a stronger market for its product. As public limited companies, they already have equity capital (although not clearly stated in what proportion). In this report, as the financial consultant, I am assuming that the total assets and leverage conditions are acceptable for both companies in terms of being suitable for any of the recommendations. Both companies need long term finance for expansion into a new sector for Gravier Plc and for Expo plc, a new market.

SUGGESTIONS FOR SOURCE OF FINANCE
Gravier plc
For Gravier plc, I will recommend Project Financing. This is because of the type project the company is trying to invest in. Investopedia defines project financing “as a form of long term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balanced sheets of its sponsors.” In other words, a special purpose entity is created for the project, thereby shielding other assets owned by a project sponsor from detrimental effects of a project failure. It is also a non-recourse loan (a secured loan that is secured by a pledge of collateral, typically real property but for the borrower, he is not personally liable). It usually involves a number of equity investors, known as sponsors as well as a syndicate of banks or other lending institutions that provide loans to the operation. The loan is usually secured by the project assets and paid entirely from the projects cash flow rather than from the general asset or credit worthiness of the project sponsors. In comparison to other forms of ordinary loans, the bank examines the credit standing of the borrower when deciding terms and conditions. The main focus is on the financial prospects of the project itself. However, Gravier plc needs to make use of project financing in a way that the project is identifiable and separable from the rest of its operational activities so that its cash flows and assets can offer the lenders some...

References: Arnold, Glen (2013). Corporate Financial Management (5th Edition) Harlow, England: Pearson.
Wishwoode, B. (2012). Project Financing. Available: http://www.investopedia.com/articles/. Last accessed 9th November, 2013.
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