M7: Capital requirements Flashcards
Why might a business need finance?
Businesses require funding for a number of reasons.
e.g.
1. Research and Development.
2. Set-Up Costs (eg equipment, staffing, premises, and IT infrastructure).
3. Marketing the business and its products
4. Expansion: Growing businesses need funds for market entry, product line expansion or
acquisition.
What are the matching principles of funding?
Must align the nature of financing with its purpose, ensuring assets and finance lifecycles match.
This helps to prevent mismatches where financing outlasts asset utility or assets can’t repay financing.
What is the relationship between risk and return in funding?
Investors expect returns to compensate for risk. Higher risk investments require higher returns, which include interest payments, dividends, and capital
appreciation.
List examples of long-term sources of finance and explain them in more detail.
1) Ordinary Share Capital - represent permanent capital for a business, and shareholders are owners with entitlement to dividends and voting rights at
AGMs (Annual General Meetings).
2) Preference Share Capital - are part of shareholders’ funds but may share characteristics with debt or equity. They don’t grant voting rights and typically
offer fixed dividends.
3) Bonds (Debentures, Loan, Stock) - represent long-term debt finance. Interest on bonds is paid before any dividends and can be at a fixed or floating rate.
List examples of medium-term sources of finance and explain them in more detail.
1) Term loans - Borrowed from banks for a few years, Fixed or flexible repayment, Fixed or floating interest rate, Bank-imposed financial covenants.
2) Hire purchase - Allows asset use with regular payments, Ownership transfers after the agreement.
3) Lease Contracts - Grants the right to use leased assets.
4) Venture Capital - High-risk, high-reward investments, Equity or debt, Medium-term horizon.
5) Business Angels - Wealthy individuals with business
experience, Early-stage investments in exchange for
shares.
List examples of short-term sources of finance and explain them in more detail.
1) Overdraft - Overdraws current accounts up to limits, Useful for fluctuating needs, Risky for long-term use.
2) Factoring - Finance by selling trade receivables, Receives a percentage in cash and the rest upon collection, Trade receivables ledger administration and Credit insurance.
What are grant funding and crowdfunding?
Grant funding is when Government departments and agencies offer assistance to companies (eg Scottish Enterprise) especially if jobs will be created.
Crowdfunding, where large numbers of investors receive shares in exchange for their investment in a start-up business can be used without giving shares in exchange. However, small rewards or gifts are often given, and the investment may or may not need to be repaid later.
What are the Sustainable Development Goals (SDGs)?
SDGs, adopted by all United Nations member
states in 2015, address interconnected issues from poverty to climate change. These 17 goals
demand global cooperation to respond to crises while ensuring fairness.
What are the three key areas of focus of sustainable financing?
- Environmental: Promoting sustainability and climate change mitigation.
- Social: Enhancing social welfare and inclusivity.
- Governance: Supporting high corporate governance standards.
What are the basic principles of responsible investing and possible responsible investing strategies?
Responsible investment, per the Principles for Responsible Investment, integrates ESG issues into
investment decisions, aiming to align financial gains with positive social and environmental outcomes.
e.g.
1. ESG Integration: Combining ESG factors into financial analysis, e.g., emissions, labour practices,
diversity, and more.
- Negative Screening: Avoid harmful investments, like tobacco, fossil fuels, or human rights
violators. - Shareholder Engagement: Influence companies through dialogue, voting, and advocacy.
- Positive Screening: Select ESG-friendly investments, such as renewable energy or education.
- Sustainability-Themed Investing: Focus on themes for social and environmental impact.
- Impact Investing: Invest for measurable social and environmental good, alongside financial
returns.
What are sustainable finance instruments and describe the main products and mechanisms that are being used?
Sustainable finance instruments refer to financial products and mechanisms designed to promote sustainable development, address environmental challenges, and support socially responsible initiatives.
e.g.
* Green bonds
* Green loans
* Social bonds
* Sustainability -linked bonds
* Sustainability development goal bonds
* Green and sustainable funds
Describe some of the main emerging trends and challenges of sustainable finance and investing.
Trends:
- ESG Integration - More investors are integrating
ESG factors into their investment strategies.
- Climate Risk and Scenario Analysis: Understanding climate-related risks, opportunities, and scenario analysis’s role in financial decision-making is gaining importance.
- Sustainable Real Estate - Real estate sector, focusing on energy efficiency, green building certifications, and eco-friendly design.
- Circular Economy - The concept of the circular
economy, which aims to reduce waste, reuse
materials, and promote sustainable production
and consumption, is gaining traction.
Challenges:
- Lack of Standardisation - The absence of
consistent ESG reporting standards makes it
challenging for investors to compare and assess
sustainability performance accurately.
- Greenwashing: some companies engage in
greenwashing, misrepresenting, or exaggerating
their environmental or social efforts.
- Short-Term Focus: Historical emphasis on
short-term gains in the investment industry may
hinder the integration of long-term sustainability
considerations
- Regulatory and Policy Uncertainty: Rapidly
evolving regulations and policies related to ESG
and responsible investing can create uncertainty
for investors and businesses..
What are the advantages and disadvantages of joining an exchange?
Advantages:
1. Raising Finance: Issuing securities to external investors can secure significant capital for the
company, which is often the primary reason for seeking a listing. Listing also provides easier
access to future capital.
2. Enhanced Status: A quoted company enjoys enhanced status, which can benefit interactions with
third parties, including business partners and customers, and aid in recruitment efforts.
3. Higher Profile: Public market listings attract investors who may not have otherwise heard of the
company, increasing visibility and potential investment.
4. Exit Route: Existing shareholders can sell their shares on the exchange, realising the value of
their holdings in cash.
Dis-advantages:
1. Cost: The process can be expensive, encompassing initial listing expenses and ongoing
compliance costs.
2. Public Scrutiny: Public and stock market scrutiny intensifies, making company mistakes more
visible, potentially affecting share prices on poor results.
3. Dilution: Control over the company can dilute as public ownership grows, reducing the original
investors’ percentage of share capital.
4. Ongoing Responsibilities: Listed companies must comply with rigorous ongoing obligations set
by stock exchanges and regulators.
What are the different types of listing on the main market?
- Premium Listing: This segment is open to equity securities only and adheres to stringent
listing rules based on the ‘super-equivalent’ standard set out by the Financial Conduct
Authority (FCA). - Standard Listing: Both equity and debt securities can be listed with a standard listing, which
complies with EU minimum requirements. - High Growth Segment: Designed for rapidly growing revenue-generating businesses aiming
to progress to a premium listing in the future. - Specialist Fund Segment: This segment targets highly specialized investment entities
focused on institutional or highly knowledgeable investors.
What are the purposes of a nominated adviser (NOMAD) and broker and why do they need to be employed?
NOMAD are typically investment banks or corporate finance firms, are vital for AIM listings. These LSE-approved entities guide businesses through the listing process and ongoing obligations.
Brokers – AIM listed firms must always retain at least one broker who facilitates trading, offers
research, and provides corporate finance advice.
