2. Efficient Sources of Funds
Major categories of fund sources for a business:
Debt capital: Funds obtained through borrowing
Equity capital: Funds provided in exchange for some
ownership in the firm.
3. Short-Term Financing: Debt Capital
Used to obtain money to finance current operations
Repayment required within one year
May come from several sources:
Trade credit
Family and friends
Commercial banks
Internal funds management
4. Short-Term Financing
Trade Credit
Most widely used source of short-term financing
Credit given by suppliers for the purchases the firm
makes from these suppliers
• Family and friends
For funds needed for a short time
Extra risk: If business goes sour, not only is there
loss of business but loss of relationships too!
5. Short-Term Financing
Commercial banks
Bank loans come in many different forms;
Unsecured loans:
Most difficult loans to get from a bank
Issued on the good credit of the borrower and
requires no collateral
**New businesses have difficulty getting these loans
6. Short-Term Financing
Commercial Banks
Secured loans
Backed by some form of collateral ( Reduces risk for
the banker)
**Where borrower fails to pay the loan, lender may
take possession of property, equipment, inventory or
accounts receivable.
** Pledging: Using accounts receivable as collateral
for a loan
7. Short-Term Financing
Commercial Banks
Line of credit: A preapproved amount the holder may
borrow in whole or in part, provided that the bank has
sufficient funds
Revolving Credit Agreement: Guarantees that the bank will
honor the company’s line of credit up to the stated amount
(generally requires payment of a fee)
Factoring: The sale of accounts receivable to a bank or
other lender, generally at a considerable discount.
** Seller receives less than the full value of the accounts
receivable.
Floor-planning: Borrowers will assign the title to their
inventory to the bank as a collateral (Borrowers pay off loan
as inventory sold)
8. Short-Term Financing: Internal Funds
Management
Close review of balance sheet and accounting ratios
Overdue accounts receivable can be collected more
quickly/ Discount may be offered for early payment
Inventory reduction ( manager must remember to
retain adequate inventory)
Cost cuts, expense reduction
9. Long-Term Financing: Loans
Loans:
Direct loans- Generally given to higher risk
business, at lower interest rates.
Guaranteed loan: Loan actually comes from a private
lender ( beneficial for small business owners)
Term loan agreement/ promissory note: Requires
the borrower to repay the loan according to a
schedule of specified installments ( either at
fixed/flexible rate of interest
10. Requirements for Long-term loans
Some form of collateral ( real estate, machinery,
equipment or stock)
When determining interest rates for loans, banks will
look at;
Length of time the loan is for
Type of collateral
The firm’s credit rating
General level of market interest
11. Long-Term Financing: Bonds
Bond: An agreement between a firm and an investor
with specific terms spelled out in an indenture
** IOU with an investor stipulates periodic interest
payments (every 6 months) and payment of the
principal at maturity (10 yrs/more)
Secured bond: Backed by some form of collateral
(real estate, inventory) that will pass to the
bondholders if company does not live up to
agreement terms.
Unsecured/debenture bonds: Backed by the good
name of the issuing company.
12. Long-Term Financing: Bonds
Junk bonds: Designates a low-grade bond issued by
financially weak companies with no solid collateral.
** Funds internal expansion, corporate acquisitions
** Have very high interest rates
• Callable bonds: Give the company the right to
purchase back its bonds early ( Slightly higher rate of
interest, company pays a premium to the holder
when the bonds are called)
• Convertible bonds: Can be paid off with stock in the
company. Amount of stock indicated in the
indenture terms.
13. Long-term Financing: Public sale of stock
Stocks: Shares of ownerships
Shareholder receives a stock certificate (shows the
name of the shareholder, number of shares of stock
owned, special characteristic of stock)
Authorized stock: All the shares of stock that can be
sold at any time
A company will typically, sell only a portion of their
authorized stock, shares sold are called issued stock.
(Unsold shares- unissued stock).
14. Other forms of Long-term financing
Leverage: Use of long-term debt to raise needed cash
(Works to maintain higher rates of return on owner’s
investments)
Equity capital
Retained earnings: Profits chosen by owner to leave in
the company rather than pay them off as dividends
Contributions
Sale of partnerships
Venture capital: Funds provided by individual/
organizations to new firms with high growth potential.
Investor receives a share of the ownership and share of
control.
15. Managing Finances Of The Firm
Managing working capital
Developing capital budgets
Developing financial controls
16. WORKING CAPITAL
Current assets minus the current liabilities
Current assets of cash, accounts receivable and
inventory must be managed
Cash must always be earning interest income
Accounts receivable must be collected quickly
Inventory must be kept to the minimum needed to
satisfy customer demand
Accounts payable should be paid in time to take
advantage of cash discounts.
17. Capital Budgets
Represent funds allocated for future investments of
the firm’s cash
Investments: Plant expansion, equipment
improvement
Capital budget has limited funds ( requires
evaluation of all proposed capital expenditures for
maximum return)
Determining long term rate of return difficult:
Depends on customer response, competitive
reactions, state of the economy.
18. Summary of the specific duties of the financial
manager
Responsible for maintaining proper flow of funds
Managing uses of funds
Help find sources of funds
Finding appropriate investments for excess cash
Managing the company’s working capital and capital
budgeting process
Developing appropriate financial controls
** When comparing actual and projected results
manager must look for deviations and corrective
action taken.
