Sources of Finance | Free Essay Example

Sources of Finance

Words: 1289
Topic: Business & Economics
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Executive Summary

The finance market is made up of different institutions that play different roles that are complementary or totally different. Whenever businesses require more money that they do not have, they are entitled to borrow from other institutions without forgetting that they are profit making organization. Different financing options that have been described in this paper have merits and demerits that define how they are supposed to work. The discussion in this paper provides an insight about different sources of finance.

Introduction

Companies as business entities always work for profit and also for survival at different times and moments. Over a period of time, a company may have more needs than the finances it holds in its coffers. Such a situation dictates that a company finds other sources of finance to continue working or holds back their plans until the financial position allows them to move forward. Some situations will force a company to close down if their financial position becomes dire yet there is no remedy. In the quest to achieve intended objectives, companies have an avenue that can be used to raise new funds. Different options are available depending on the situation or the elected mode that is preferable by the company. The paper explains different models that can be deployed by a company to secure finances.

Rights Issue

A company as an entity is usually owned by individuals or other corporate bodies that provided the capital that was used to start the company. Under the company’s financial statement, the owners’ equity is recorded as capital thus owed to the investors (Arnold 2014, p. 52). Each investor is usually allocated shares according to the amount of equity they have invested in the company. Therefore, when a company requires more finances, the management can call upon the owners of the company to pump in more money which would then be reflected in their shareholding (Ferran & Ho 2014, p. 35). Increasing owner’s equity is usually an in-house move that does not invite outsiders into the company. Usually, the company would do that to avoid an upset in the ownership setup by locking out other investors who may want to join the business.

The advantage of using a rights issue is that the process is less complicated compared to other modes that require a lot of scrutiny from authorities (Peirson, Brown, Easton & Howard 2014, p. 63). Working through an in-house arrangement retains the control of the company within members who have worked together and are known to each other. The challenge of allowing a new investor to join in means that the status quo no longer stands in the way decisions used to be arrived (Ferran & Ho 2014, p. 35). On the other hand, the deal to increase owner’s equity might easily contribute to the stagnation of the company because it locks out new ideas. The deal may limit the company’s prospects of raising more money in case the owner’s finances are limited compared to the financial needs being solved.

Bank Loans

Banks are the some of the biggest financiers of businesses and individuals through loans. Banks are big players in the money business to the extent that they are the biggest holders of liquid cash and to other assets. Banks hold clients’ money and trade with that money for a profit in terms of interest that is charged on money that is borrowed (Jiménez, Lopez & Saurina 2013, p. 185). Banks are a ready source of finance for any organization that approaches them to that effect. The advantage of approaching banks is that they have ready packages that a client can choose from or negotiate to their satisfaction. Bank loans are structured to be paid back in within a specific period of time and at a certain interest rate that would be agreed upon.

The advantage of a bank loan is that it is agreeable between the bank and the borrower without too much scrutiny from other authorities. It is the prerogative of the bank to give a loan to any borrower who satisfies the set conditions so long as the borrower is agreeable to the conditions. Some bank loans attract collateral while others do not attract any form of collateral. Bank loans can be risky if the borrower fails to meet the repayment terms and attract hefty penalties on top of the interest that charged (Jiménez, Lopez & Saurina 2013, p. 185). Bank loans compare well with other financing options because they provide the required liquidity within the shortest time possible. Interest rates within the banking industry vary with individual packages and also with prevailing economic conditions of a country. When economic conditions are not good, bank loans become expensive and when they are good, the loans become affordable.

Venture Capitalists

Venture capitalists are a source of finance for mostly innovators who have a great idea but do not have a capital base to launch their products. Venture capitalists are selective in nature because they only invest in projects that have a great viability to succeed (Beugré & Das 2013, p. 23). Venture capitalists are investors who are ready to finance projects in return for intellectual property ownership shares and returns that will be realised from the investment. Venture capitalist can be described as discriminatory in nature because they only finance projects that they are sure have a great potential for good returns or those that have proved fertile on a smaller scale. Venture capitalists come with a great advantage to the project that they are financing.

Most of them do not just finance, but go ahead to ensure that the project succeeds using their connections in different industries (Beugré & Das 2013, p. 23). The disadvantage that may come with seeking the support of venture capitalists is because they vary in what they want from an investment. An investment that has been rejected by one capitalist may easily be embraced by another one. Therefore, they lack a specific standard to determine their decisions. As sources of finance, venture capitalists are not open to everyone because they target a specific market niche that they invest. It is also prudent to understand that they have been described as sharks because of their aggressive bargaining nature that will always tilt in their favour (Beugré & Das 2013, p. 24). However, they are a great source of financing and have been credited with lifting some of the greatest ideas.

The Stock Market

The stock market is a great source of financing by organisations who wish to raise capital for purposes that have been identified. The stock market allows a business to float shares to the public through an initial offer. The company offering shares on the stock exchange must meet specific legal requirements that have been set by regulators because it going to change from a private company to a public entity (Aitken, Harris & Ji 2015, p. 149). The stock market is a good place for recapitalising companies that need to raise funds for specific purposes. However, raising finances through the securities exchange attracts some costs that are bore by the company. The company business will also be subject to the regulators conditions for working as a way of protecting investors funds. The stock exchange has a down side to the extent that not all shares that are offered for sell perform as projected. Investors can easily fail to embrace a share offer thus derailing the financing plan.

Conclusion

Different types of financing exist in the market and it is the responsibility of the borrower to identify one that suits their interests. In the market, there exist consultants on matters finance who can offer advice to clients so that they end up with the best option.

Reference List

Aitken, M Harris, F & Ji, S 2015, ‘A worldwide examination of exchange market Quality: greater integrity increases market efficiency’, Journal of Business Ethics, vol.132, no. 1, pp.147-170.

Arnold, G 2014, Corporate financial management, Pearson Higher Ed, London.

Beugré, C & Das, N 2013, ‘Limited capital and new venture creation in emerging economies: a model of crowd-capitalism’, SAM Advanced Management Journal, vol. 78no. 3, pp. 21-30.

Ferran, E & Ho, L 2014. Principles of corporate finance law, Oxford University Press, London.

Jiménez, G, Lopez, J & Saurina, J 2013, ‘How does competition affect bank risk-taking?’, Journal of Financial Stability, vol. 9, no. 2, pp.185-195.

Peirson, G, Brown, R, Easton, S & Howard, P 2014. Business finance, McGraw-Hill Education, Australia.