Business Finance Study Notes

Define various forms of finance:
- Various finance forms typically used by small and medium-sized organizations.
Identify retained earnings and working capital:
- Understanding their contribution to business financing.
Explain debt factoring:
- Its role in managing cash flow and reducing credit exposure.
Understand bank overdrafts:
- Purpose, terms, and implications as a financial tool.
Compare bilateral and syndicated facilities:
- Suitability for different financial needs.
Describe leasing process:
- Benefits for both lessors and lessees.
Define equity finance:
- Types of shares for raising funds, including ordinary and preference shares.
Explore venture capital and private equity:
- Their essential funding contributions to organizations.
Identify angel investors' contributions:
- Their role in financing and supporting startups.

Raising finance performs two key roles:
1. Provides cash to help organizations meet obligations to creditors and employees, enabling liquidity for timely payments.
2. Provides capital for establishing operations and supporting development and expansion, including financing long-term investments such as infrastructure.

Retained Earnings:
- Defined as the post-tax undistributed profits of a company. Monies not paid out in dividends and not yet capitalized as additional shares.
Working Capital:
  - Refers to resources available for day-to-day operations:
    - Cash at the Bank: Immediate liquidity available for transactions.
    - Stock (Inventory): Goods held for sale or use in production.
    - Receivables (Trade Receivables): Money owed by customers.
    - Payables (Trade Payables): Money owed to suppliers.
Limitations:
- New organizations may have limited capacity to use retained earnings due to low profitability from start-up costs.
- Many small businesses have limited working capital, hindering growth. Negative working capital occurs when trade payables exceed trade receivables, meaning suppliers effectively finance operations, advantageous in industries with immediate customer payments or longer supplier payment terms.

Debt Factoring (Factoring):
- A financial arrangement where an organization sells its accounts receivables (invoices) to a third-party factoring company at a discount.
Benefits:
- Improve Cash Flow: Receive cash for outstanding invoices immediately.
- Reduce Credit Exposure: Transfer risk of unpaid invoices to the factoring company.
How Factoring Works:
  - Agreement with a Factoring Company: Organization contracts with a factoring house to sell trade debts.
  - Immediate Payment: Factoring companies advance a percentage (often up to 90%) of invoice value, factoring in their charges.
  - Debt Collection: The factoring company collects payments from customers.
Mini Case: SpeedTech Electronics and Debt Factoring:
- SpeedTech faced cash flow issues due to client payment delays (60-90 days).
- They sold outstanding invoices to a factoring company, receiving 80% of invoice value upfront. The factoring company collected payments directly from customers and later paid SpeedTech the remaining 20% (minus fees). This improved cash flow and supplier payments.

Definition:
- An overdraft is a flexible short-term financing option allowing organizations to withdraw more money than available in their account, within a pre-agreed limit.
Use Cases:
- Effective for managing seasonal cash flow shortages and temporary liquidity gaps.
Comparison - Overdrafts vs. Loans:
- Flexibility of overdrafts contrasts with structured loans that have fixed repayment schedules.
Negotiation Terms:
  - Maximum Limit: Upper limit of the overdraft.
  - Interest Rates: Vary based on amount utilized.
  - Utilization Fees: Additional charges when the overdraft is accessed.
  - Review Period: Annual assessments of overdraft eligibility.
  - Covenants: Financial performance conditions imposed by banks.
  - Notice Period: Possible notice requirement for fund access.
  - Security: Banks often request collateral from small businesses.

Definition:
- Bank finance involves borrowing from banks, crucial for funding organizations.
Forms of Bank Finance:
  1. Bilateral Facilities:
     - Borrower secures funds from a single bank, suitable for smaller needs.
  2. Syndicated Facilities:
     - Multiple banks share lending risk, typically for larger loans. A lead bank organizes the syndicate, bearing initial risk before distributing it.

Definition:
- Leasing is a financial arrangement where the lessee uses an asset owned by another entity (lessor) for a specified period in exchange for payments.
Process:
  1. Asset Acquisition: Lessor acquires necessary assets (e.g., IT equipment).
  2. Lease Agreement: Lessee pays lease payments over time.
  3. End of Lease: Options to return, renew lease, or purchase the asset.
Benefits of Leasing:
  - For Lessors:
    - Retain ownership, receive secure income through lease payments.
  - For Lessees:
    - Avoid large upfront costs, access essential equipment, enjoy flexibility in asset utilization.
Limitations:
- Long-term costs may exceed ownership due to cumulative payments. The lessee does not own the asset unless a final purchase is made, and leasing terms might restrict usage.

Definition:
- Raising funds by issuing shares; applicable to public and private companies for operational financing.
Types of Shares:
  - Ordinary Shares:
    - Represent ownership; profits after creditors' payment, includes voting rights, no guaranteed dividends.
  - Preference Shares:
    - Fixed dividends before ordinary shares, limited voting rights.
Valuation of Shares:
- Nominal Value (Par Value): Face value of shares, e.g., £1.
- Market Value: Current trading price, e.g., a nominal share of 25p trading at £10.
Examples:
- Company ABC issues shares with £1 nominal value, traded at £20. Investors receive dividends based on profits, with preference shareholders receiving a fixed 5% dividend annually before ordinary shareholders.

Overview:
- Venture Capital (VC) provides funding mainly for new companies, occasionally for mature ones. Private equity involves investments without public share issuance.
Target Companies:
  - New Companies: Startups seeking early growth.
  - Mature Companies: Established businesses for growth or restructuring.
  - Private Equity Benefits: Funding without public scrutiny or market pressures.

Definition:
- High-net-worth individuals who invest personal funds into smaller companies, often at early stages.
Functions:
- Provide seed capital for startups or small businesses lacking access to traditional financing. They can pool resources for larger funding rounds.

Mention of the "Shark Tank" program, a platform for entrepreneurs to pitch to investors, indicating practical examples of finance raising.
Encouragement to watch a related video on entrepreneurial finance.