Influences Flashcards
(33 cards)
Define Sources of finnance
Def - The consideration of how much finance a BUS requires and where to get it from (the source)
Must consider short and long term needs
Internal Sources
Def: Come from within BUS, recorded under OE for balance sheet
Retained Profits - profits that are not distributed but kept within the BUS to finance future activities
OE = owners funds
External Sources Types:
Debt - (Any borrowed money) owed to external sources. Includes interest (tax deductible), risk/return, increased gearing
Equity (can be internal as well) - Low risk, low gearing, does not have to be paid, dilution of ownership, bad for shareholders.
Short Term Debt
COF
Overdraft
Bank allows business to overdraw its account to an agreed limit (negative cash)
Used for short term liquidity problems (low sales in the month)
ADV: 1. Helps with short term liquidity 2. Allows negative value in account 3. Convenient/flexible
DIS: 1. Relatively high interest (10%) 2. Fees with set up 3. Interest must be paid regardless of profitability
Commercial bills
Issued by financial institutions
Usually amounts for $100,000 or more, 30-180 days for the loan
If Higher risk more interest but generally 3-4%
ADV: 1. Borrow sig funds 2. Receive money immediately 3. Cheapest form of finance
DIS: 1. Repaid + interest 2. Interest 3. 3. Interest must be paid regardless of profitability
Factoring
Bus sells ACC REC to a firm who specialises in collecting ACC REC
Used to improve cash flow, BUS does not get all of acc rec some goes to other firm
ADV: 1. Immediate access to funds (cash flow increase) 2. Cost effective way of sourcing 3. Factoring company takes over management of ACC REC and collection of it
DIS: 1. Don’t get a full amount (greater risk = higher fee) 2. Impacts possible customer relations with ACC REC 3. Impact on the brand reputation
Long Term debt finance
Greater than 2 years, used for real estate, factory/office/equipment (MUDL)
Mortgage
Used for purchasing a premises, factory or office
Agreed time (e.g 15 years)
ADV: 1. Access to significant funds 2. Predictable monthly payments 3. Lower IR since secured asset
DIS: 1. Interest must be paid regardless of profit 2. Poss increase in IR 3. Fall in value of property poss
Unsecured Notes/Bonds
No asset involved as security therefore high IR
Loan for a set period of time
Used for generating funds for acquisition/expansion etc.
ADV: 1. Access to SIG fund 2. No Asset on the line 3. Does Not dilute control of existing owners
DIS: 1. Funds must be paid on date 2. Increased Gearing 3. Higher IR
Debentures
Issued for a fixed rate and fixed time, security used in the form of an asset
Regular Interest payments then pay loan on a future date
Prospectus (outline the purpose for the capital) must be lodged with ASIC before use
ADV: 1. Significant funds for expansion 2. Fixed IR 3. Debenture holder doesn’t get vote rights
DIS: 1. Must have prospectus 2. Increase level of gearing 3. Must be paid on an allocated date
Leasing
Payment for equipment, property owned by another party - Maintenance, insurance and other costs
Used to borrow funds to use a facility etc without purchasing
ADV: 1. Using an asset without buying 2. Don’t affect gearing (not on balance sheet) 3. Tax deductible
DIS: 1. Higher IR 2. Higher overall costs 3. Don’t own the asset.
Equity - Ordinary Shares
Ordinary Shares issued by public companies on ASX, Shareholders are part owners of a business
Shareholders get voting rights and dividends in proportion to the amount of shares they own.
New Issue
First time issue of a share on the ASX, (primary shares or new offering)
Prospectus issued by a stockbroker (prospectus is a document outlining how investors money will be used.
ADV: 1. Significant funds 2. Not relying on debt so less risk 3. Bus chooses how much and when in terms of dividends
DIS: 1. Loss of control as dilution of ownership 2. Process of issuing shares expensive 3. Under Subscription poss (not enough interest)
Rights Issue
Offered to current shareholders to buy new shares in the same company in proportion to the share in order to raise funds.
ADV: 1. Easier to obtain finance from shareholders who are familiar with BUS 2. No shareholder approval required if it is less than 15% capital of what the value of BUS is. 3. Can be more than $30k
DIS: 1.Prospectus may be needed 2. Value of each share diluted because of an increased amount of shares 3. Share price may decline as a result
Placements
Offer shares to specific institutions/investors
Done to expand the BUS activities (acquisition and growth)
ADV: 1. Don’t need prospectus 2. Don’t need shareholder approval 3. Prevent hostile takeover bids occurring
DIS: 1. Bad for shareholders (value of 1 share goes down) 2. Share price may need to be discounted for the Investor 3. May be coerced into a deal due to cult of personality
Share Purchase Plan
Offer existing shareholders more shares without brokerage fee
Can’t be more than 30k worth of shares per investor (the diff between SPP and Right issue)
ADV: 1. Don’t need prospectus 2. Shareholders already used to BUS 3. Easy/inexpensive
DIS: 1. Protection for investors (30k) 2. May not raise as much as rights issue 3. BUS incurs brokerage cost
Equity - Private Equity
Only PTY LTD (private company)
Aim to raise capital to expand the business
New issues of shares which are not publicly listed
Dilution of ownership = DIS
Investors may only be in it for medium term to make profit (2-5 years) DIS
Financial Institutions
B(banks) U(Unit trusts) S(superannuation) F(finance companies) A(ASX) I(investment banks L(life insurance)
Banks
Provide long term and short term finance
Provides services such as loans, credit cards and deposit accounts to households and businesses
Examples: The big 4: ANZ, CBA, NAB, Westpac
Finance Companies
Non bank financial intermediaries that specialise in smaller commercial finance and don’t accept deposits.
They raise their money through share issues (debentures)
Provide medium and short term loans to businesses through: Consumer-hire purchase loans, personal loans and secured loans
Some finance companies specialise in factoring or cash flow financing
Provides quick access to funds although usually higher IR
Life Insurance
Provide loans to the private sector through the receipts of insurance premiums which fund the investment.
Provide both equity and loans to businesses
Interest higher than bank loans
Investment Banks
Specialist banks that provide financial services for large businesses and deal mostly with international finance.
Provide services in borrowing and lending primarily to the business sector
E.G: Macquarie Bank and Goldman Sachs which apple works with
Superannuation Funds
Collect 9.5% of income
Companies offer businesses loans as a way of investing some of their funds
Invest in shares, government and company debt
