Chapter 19 - Business Finance: Needs and Sources
Class Objective: To understand the factors impacting sources of financing available
To finalize financing we have to discuss government grants and microfinancing:
Government Grants:
Incentives towards boosting business activity and growth;
It comes in various forms: tax benefits, renting benefits, etc.;
It does not need to be repaid.
Microfinancing is a common form of finance in developing economies:
Targeted to entrepreneurs with no personal savings and who banks are not willing to lend (too risky);
Usually to be repaid within 6 months and once repaid made available to other borrowers;
What financing method is the best? Which one should a business pick?
There are many factors influencing the choice of financing to a business:
1. The size and legal form of the business:
Only PLC can issue shares;
Small businesses have a hard time getting loans (and high interest).
2. The amount required:
Bank loans have a limit depending on the business;
Leasing and hire purchases are limited to the cost of the asset;
Share issuing and debentures can raise large amounts of financing.
3. The amount of existing borrowing:
Companies with high amounts of debt find it harder to borrow further financing (risky);
When choosing the best method of financing to a business, therefore, the benefits and limitations should be considered. Extra considerations:
Retained earnings is cheap but can only be done by profitable businesses but it generates less dividends to shareholders;
Banks are likely to borrow to profitable/large businesses;
The type of activity being funded impacts the the source of finance (e.g. mortgage);
Ownership and control should be considered as it can be lost depending on the source of financing chosen.
Test yourself (p. 256)
Case study (p. 249)
To-Do-List:
Exam-Style Questions #1 (p. 257)
Chapter 19 - Business Finance: Needs and Sources
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