🪴 JoshNotes

external sources of finance

Sep 11, 20254 min read

  • External finance refers to the funds provided by sources outside the business, including banks, other financial institutions, government, suppliers or financial intermediaries.

Debt:

Short-term borrowing:

  • included on balance sheets as ==current liabilities==
  • Less than 12 months
  • The sources of short-term debt are:
    ?
  • Overdraft
  • Commercial bills
  • Factoring

Overdraft

  • One of the most common types of Short-term borrowing
  • An overdraft is when :: A bank allows a business or individual to overdraw their account up to an agreed limit and for a specified time
  • to help overcome a temporary cash shortfall
  • Costs are minimal; lower interest rates than other forms of borrowing
    • interest is paid on the daily outstanding balance of the account.

Commercial bills

  • Commercial bills are :: primarily short-term loans issued by financial institutions, for larger amounts (usually over $100 000) for a period of generally between 30 to 180 days.

Factoring

  • Factoring is :: the selling of accounts receivable for a discounted price to a finance or factoring company

  • It enables a business to raise funds immediately by selling accounts receivable at a discount to a firm that specialises in collecting accounts receivable

  • A factoring company may offer its services with or without recourse, meaning:
    ?

    • ‘Without recourse’ means that the business transfers responsibility for non-collection to the factoring company.
    • ‘With recourse’ means that bad debts will still be the responsibility of the business.

Long-term borrowing:

  • included on balance sheets as ==non-current liabilities==
  • More than 12 months
  • The sources of long-term debt are:
    ?
  • Mortgage
  • Debentures
  • Unsecured notes
  • Leasing

Mortgage

  • A mortgage is :: a loan secured by the property of the borrower (business), (property as collateral)

Debentures

  • a debenture is :: a promise issued by a company to repay a loan for a fixed rate of interest and for a fixed period of time
  • investors can buy debentures from a company with promised returns at an interest to their original investment (less secure than a bank) (greater interest)

Unsecured notes

  • An unsecured note is :: a loan from investors for a set period of time. that are not secured against the businesses’s assets (high risk to investors)

Leasing

  • leasing is :: the payment of money for the use of equipment that is owned by another party
  • Viable for businesses with a liquidity problem
    • businesses can sell their assets, and lease them back (re leasing)
    • Lease payments are tax deductible

Equity

  • equity as an external source of funds‚ refers to :: the finance raised by a company through inviting new owners
  • used as an alternative to debt funding
  • Equity as a source of external finance includes:
    ?
  • ordinary shares (new issue, rights issue, placements, share purchase plan)
  • private equity

Ordinary shares

?

  • Ordinary shares are the most commonly traded shares in Australia.

  • The purchase of ordinary shares by individuals means they have become part owners of a publicly listed company.

    • they get voting rights according to the number of shares
    • as well as payments called dividends:

  • a dividend is :: a distribution of a company’s profits (either yearly or half-yearly) to shareholders, calculated as a number of cents per share

  • different types of ordinary shares commonly traded in Australia:

    • New issue
      • a security that has been issued and sold for the first time on a public market
      • e.g. Initial public offerings (IPOs)
        • must prepare a prospectus and lodge it with ASIC
    • Rights issue
      • an invitation to existing shareholders to purchase additional new shares in the same company at a certain date and discounted price
      • This type of issue gives existing shareholders securities called rights.
      • used to raise additional funds
    • Placements
      • non-existing shareholders
      • involves creating new shares in return for capital and issuing them to selected investors at a discount to their current trading price
      • to special institutions or investors who are able to invest a large sum of money.
        • intended to persuade specific investors to invest in the company.
    • Share purchase plans
      • an offer to existing shareholders in a listed company to purchase newly issued shares in that company without brokerage fees.
      • usually offered at a discount to the current market price.
      • allows companies to issue new shares to current shareholders without issuing a prospectus
      • can only issue a ==maximum of $30 000== in new shares to each shareholder.

Private equity

  • Private equity is :: the money invested in a (private) company not listed on the Australian Securities Exchange (ASX).
  • to raise capital to finance future expansion/investment of the business.

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