External financing
How it works
External financial support comes in
various forms, including bank loans
and issuing shares. The available
sources of outside financing
depend on the amount a company
requires, and whether the money
is needed to resolve a short-term
issue, such as cash flow, or for the
long-term growth of the business.
While short-term financing is easier
to secure, finding larger sums for an
expansion is more challenging.
A company that is either already
listed on a stock exchange or is
preparing to enlist will be able to
raise the capital through the sale
of shares. However, an unlisted
company may struggle to raise a
comparable amount. A company
with a large amount of debt will
also find it hard to raise funds,
since lenders or investors will
see the business as risky.
When business growth or unforeseen expenses cannot be met using
internal sources of financing, such as retained profit, organizations
must rely on finding funds from lenders or investors.
Term loan A bank debt repaid
over a set period of time
Loan note A form promising
payment to the holder at an
agreed future date
Eurobond A bond issued in a
currency other than the currency
of the country in which it is issued
Bank line of credit
Borrow from business checking
account up to an agreed limit, with
interest typically at a high rate.
Debt factoring
Sell unpaid invoices to an external
source for an agreed amount in order
to receive immediate payment minus
a commission fee.
Invoice discounting
Borrow money against sales invoices
customers are yet to pay (again, often
at a disadvantageous rate).
Short-term financing
A range of financial agreements that help provide a
company with immediate funds can be made with
outside parties as a way of raising cash short-term.
NEED TO KNOW
Raising external
financing
Generating funds from external
sources can be a challenge, especially
when securing investors. However,
the funds do not necessarily need
to take the form of a loan. There are
a number of strategies that can be
implemented through working with
external parties in order to provide a
company with good working capital.
80%
of external
corporate
financing is
provided by
domestic banks
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HOW FINANCE WORKS
Raising financing
DEBT FACTORING PROCESS
To get money immediately, a company sells unpaid invoices (accounts receivable)
to a third party, known as a “factor.” The factor advances the company a major
portion of the amount, retains the rest until the account is paid, then charges a fee.
Company negotiates
an agreement in which
its unpaid receivables
(invoices) are sold at a
discount to a “factor.”
Company sends invoices
out to customers, and
copies these to the
factor. Customer now
owes payment to factor.
Factor pays company
an agreed percentage
of the invoices (typically
80–90 percent) within
a few days of receipt.
Customer pays
factor the invoice
amount after 30 days
(or more if terms of
payment are longer).
Factor pays remaining
invoice amount to
company, minus a fee
(usually 2–5 percent of
the invoice amount).
Long-term financing
Putting effective measures in place to provide ongoing
funds is essential for a company’s long-term growth.
Company
Shares
Raise capital by issuing shares to finance
growth. The company then retains less
profit, as it pays dividends to shareholders,
who also benefit from any capital gains in
the company’s value (see pp.164–165).
Borrowing
Secure long-term loans from banks and
other financial institutions, usually on
better terms than a bank line of credit.
Finance leases
Sell expensive assets such as computers to
finance companies to release capital, and
then lease them back.
Rent-to-own agreements
Pay for expensive assets, such as vehicles,
in installments. Overall cost may be higher,
but capital is not tied up.
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