UNIT 5. Chapter 26: Business Finance (Part 2) Flashcards
Def. equity finance
• Permanent finance raised by companies through the sale of shares.
How can a business go publcic? (2)
- By obtaining a listing on the alternative investment market (AIM), which is a part of the Stock Exchange concerned with smaller companies that want to raise only limited amount of capital. The strict requirements for a full Stock Exchange listing are relaxed.
- Apply for a full listing on the stock exchange by satisfying the criteria of (a) selling at least £50,000 worth of shares and (b) having a satisfactory trading record.
What are the two main ways of sales of shares?
- Publics issue by prospectus - this advertises the company and its share sale to the public and invites them to apply for the new shares. This is expensive, as the prospectus has to be prepared and issued.
- Right issue of shares.
Benefits and limitations to rights issue of shares? (2 1)
Benefits:
• The ownership of the business does not change
• Raise in capital rather cheaply as no advertising required.
Limitations:
• The increase in the supply of shares would reduce its share price, which would worry current shareholders.
Def. Rights issue
Existing shareholders are given the right to buy additional shares at a discounted price.
Grants (3)
- For most european countries, grants come from the government or the European Union.
- Usually given to small businesses or expanding businesses in developing regions of the country.
- Grants usually come with conditions attached, such as locations or the number of jobs created. If the conditions are met, grants don’t have to be paid back.
Def. Venture capital
Risk capital invested by venture capitalists (who could be specialist organisations or wealthy individuals) in business start-ups or expanding small businesses that have good profit potential but do not find it easy to gain finance from other sources. e.g in ‘high tech’ businesses.
Def. Micro-finance
The providence of small capital sums to entrepreneurs by any investors to unincorporated businesses.
Def. Business plan
A detailed document giving evidence about a new or existing business, and that aims to convince external lenders and investors to extend finance to the business.
What are the factors influencing finance choices? Name no explanation (6)
- Use to which finance is to be put
- Cost
- Amount required
- Legal structure and desire to retain control
- Size of existing borrowing
- Flexibility
Explain how the “use to which finance is to be put” affects the finance choice? (3)
- It is very risky to borrow long term finance for short term needs
- Permanent capital may be needed for long-term business expansion.
- Short term finance would be advisable to finance short term needs.
Explain how the “cost” affects the finance choice? (2)
- Even internal finance may have opportunity cost
* Loans may become more expensive during a period of rising interest rates
Explain how the “amount required” affects the finance choice? (2)
- Share issues or debentures could be used to raise large capital sums
- Bank overdrafts could be used to raise small capital sums
Explain how “legal structure and desire to retain control” affects the finance choice?
• If the owners want to retain control of the business, than further sales of shares are unwise. (Rights issue could be used).
Explain how the “size of existing borrowing” affects the finance choice?
• The higher the existing debts, the greater the risks of borrowing more. Banks would be more anxious to lend more.
