Finance Strategy PP (1)

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Finance Strategy

Dan, Shaunagh, Titi, Josh

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Identify the key choices rms haveto make in deciding the bestmethod of nance.

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Ways to fnance a business.

1. Financed by debt, which includesborrowing in the orms o a bankloan or bonds.

. Financed by e!uity "entureca#italism, common stock

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 Ty#es o $onds

• Treasury (issued by government, risk free)

• Zero coupon (no interest, repaid at par)

• Floating rate, inflation linked (interest rate varies)

• Perpetual bonds

• Convertible bonds (to shares at specific rates)

• Callable/puttable bonds

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Shares

• %ommon stocks, #reerred stocks,&S'(s,

• )ain ca#ital * +nowledge ande#erience,

• ha"e to gi"e u# - o com#any,%ostly and time consuming,

• 'nly larger com#anies can go #ublic,S&(s are not !uoted com#anies.

• /a"e the o#tion o #aying di"idends

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0oans

• /a"e to make monthly re#ayments#lus interest. ail to risk o thebusiness going bankru#t and

#ersonal bankru#tcy.

• )ain decrease the growth rate

•  2ou kee# control

•  The interest #aid on the loan istaable, is an allowable e#ense

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What in practice do Banks look forin nancing a small-mediumenterprise?

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%3435

0ending model used bybanks

• %haracter

• 3bility

•

argin• 4ur#ose

•

3mount• 5e#ayment• nsurance

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%haracter

• )oogle

• %om#anies /ouse

•

5eerences• 0ocal knowledge

• $ank statements

•

dentity• First im#ressions

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3bility

• %67!ualifcations o team

• %om#any management structure

•

8uality o ad"isors• Financial history

• 0i!uidity

•

)earing• anagement inormation

• Strategy

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argin

• 5eward "ersus risk

• 3dditional income generatingo##ortunities

• %ommission

• Fees

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4ur#ose

• &thical use o unds

• m#ro"ing business #erormance

•

3c!uiring additional business• 3sset fnance

• 9on s#eculati"e

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3mount

• $orrower stake

• Fees

•

 Ta• %ost o"erruns

• Su:cient;

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5e#ayment

• %ash generation

• 4roftability

•

Di"erse income streams• Debtor book mi

• 5efnance

•

onitoring * control• %om#etition

• ndustry cyclicality

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nsurance

•  Ty#ical security < reehold,debenture, guarantees

• 6aluing and accessing security

• anaging interest rate risk

• anaging currency risk

•

&n"ironmental risk• +eyman7succession

• $usiness nsurance

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• 0ong term

• Sustainable and #roftable

•

5elationshi# orientated• %an re#ay their debt

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• 3 scheme with the $ank o &nglandto enable banks and buildingsocieties to borrow rom them at

chea#er rates, so they can then lendto S&s at lower interest rates

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• How accurate is nance theory inpredicting corporate borrowingbehaviour?

• iti

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• /istory does not always re#eat itsel,using conce#ts that de#end onhistorical statistics aren(t necessarily

easible or #redicting cor#orateborrowing beha"iour

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