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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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