Strategic Financial Management - Sources of Finance

1. STRATEGIC FINANCIAL
MANAGEMENT
INVESTMENT APPRAISAL – SOURCES OF FINANCE
Dayana Mastura Baharudin

6. Equity
Financing
Equity financing refers to raising
capital by giving away some
“ownership” of the company.
The firms generally raise equity
finance by selling the common stock of
the company to a closed group or the
public at large.
The possession of such stocks is
essentially what represents
“ownership” of the company or part
thereof.

7. Preferred
Stocks /
Preference
Shares
While common stocks /
ordinary shares represent
the purest form of
ownership, preferred
stocks are a diluted
version of the same.
Though they constitute
ownership shares of the
company, preferred
stocks very closely
replicate debt in their
functioning.
They are required to be
paid a fixed rate of
dividend and do not
entail voting rights.
Companies may find this
option attractive since
they are available at
cheaper costs and does
not give rise to any
repayment obligation.

8. Venture
Capital
It represents the form
of equity financing
raised from high net
worth individuals or
investment banks.
Venture capitalists step
in at the inception or
very early stages of a
startup.
They invest in
companies which depict
fast growth and high
potential
characteristics.
This one of the most
expensive forms of
financing since the
company ends up giving
away a significant
chunk of its ownership.
However, the right
venture capitalists may
add great value to the
firm with which they
get associated.
They bring in with them
a lot of experience,
networks, and synergies
which go a long way in
the success of the firm.

9. Mezzanine
Finance
It is a slightly complex form of financing.
Mezzanine finance starts off as a debt but may be converted into
equity in the event of default by the company.
It is opted by sufficiently established companies with predictable
cash flows.
This option is resorted to when the firm has exhausted its ability
to take on senior debt.
This form of equity financing is typically costlier than regular
debt. However, it gives the company a chance to raise funds
without diluting its ownership.
The conversion of debt into equity in the worst case scenario
provides a tight security to the mezzanine finance investors.

10. Crowd Funding @ Go Fund Me
This is the most recent form
of equity financing that has
emerged with the advent of
social media. It refers to
raising small amounts of
money from a large number
of individuals.
The fast-paced social
network enables small
companies to display their
products and goals online to
a large audience.
These individuals, who are
people like you and me,
contribute in their own
capacity to the projects
they resonate with.
These contributions can be
as low as even $1! It is in
the multiplicity of such
transactions into millions
where such crowdsourcing
projects find success.
Though most of such
projects are reward based,
equity-based crowdfunding
is rapidly gaining
momentum.
Huge pieces of equity are
not required to be sold to
the venture capitalists. The
small investors are also able
to gain some ownership in
the projects with high
potential.

11. Equity
Finance – No
Urgent Funds
Needed
Raising equity finance means bringing
on board co-owners to run the show
with.
It requires pitching and making
several presentations before the
investor actually steps in.
Even in the case of companies opting
for an Initial Public Offering (IPO), the
process is time-consuming.
There is a significant delay between
the issue of securities in the primary
market to the final receipt of funds.

12. Equity Finance - Money Making Not The Main
Focus
WHEN MORE THAN JUST
MONEY IS ON YOUR MIND
EQUITY FINANCING MEANS
SUCH AS VENTURE CAPITAL
AND ANGEL
INVESTORS BRING ON BOARD
MORE THAN JUST FINANCE.
THEY ARE PURSUED FOR
PRICELESS EXPERTISE AND
CONTACTS.
ONLY HANDSOME EQUITY
VALUATIONS AND STAKES
THEREIN CAN LURE SUCH
INVESTORS.
SIMPLY SOURCING DEBT
CANNOT FETCH SUCH
STRATEGIC PARTNERSHIPS.

13. Equity Finance – Company In Its Infancy
Some startups and new
venture prefer giving
away some ownership
rather than attracting
debt.
Debt comes with an
obligation of fixed
interest payments.
This may not be
appealing to companies
who are just starting
with their cash flows.
Equity financing
enables the infant firms
to breathe and focus on
their operations.
They are not charged
with any fixed
obligations and are only
expected to share
profits as and when
they arise.

14. Advantages of
Equity
Financing
Permanent Capital - Equity forms a part of the long-term capital
structure. No repayment obligation arises during the lifetime of
the company.
No Fixed Charge -Maintenance of equity capital does not require
fixed payment of any kind. It preserves the cash flows in the
business. The shareholders only expect a share of profits as and
when they arise. Moreover, the shareholders have no say in the
declaration of dividends. Thus the company can maintain total
control over the outflow of cash.
Collateral Free - Raising equity does not result in the creation of
a charge on the assets of the company. The firm can hold a clear
title on the assets it owns. Or else they remain available to be
mortgaged to raise further capital.

15. Advantages of
Equity
Financing
Better Credit Standing - A company majorly
financed from equity sources enjoys a good
credit score. More ownership funds on
the balance sheet leave sufficient room to raise
debt capital in the future when the need arises.
Funds disposable at the discretion of the board -
The management can spend the funds raised
through equity in whatever manner it intends
to. Debts are granted for funding specific
projects. The management remains free to
invest the equity proceeds into profitable and
new ventures without going through
unnecessary hassle.