Sources of finance

Sources of finance

Short term Long term

sources sources
• Overdrafts • Equity Finance for Islamic
• Bank Loan • Debt SME Finance
• Trade Credit • Venture
• Operating Capital
Lease • Leasing
 Gearing
03 Term structure
04 of interest
Cost 02 rates

Factors affecting choice

Security
05 and
Duration 01 Covenants

06 Control
Short term sources

Overdrafts Loans Trade credit Operating lease

• Designed for day to • Medium-term • An interest-free • A contract between

day help purposes short-term loan the lessor and the
• Only pay interest • Interest and • Risks loss of supplier lessee for the hire
when overdrawn repayments set in goodwill • Lessor responsible for
• Bank has flexibility advance • Cost is loss of early servicing and
to review • Bank won't withdraw payment discounts maintenance
• Wont affect gearing at short notice
calculation • Loan interest rate
usually lower than
o/d rate
Long term sources
 in case any breech will occur
comparing with equity
company can file a case against company
and preference

In case of default debt Cheaper for

holder can force the the company
company into liquidation.

tax benefit
Interest is paid
Interest can be
by fixed or Debt out of pre-tax
profits as an
floating charges.
expense
interest can be fixed or
floating charges (can be change)

May be redeemable or
irredeemable, secured or
unsecured.
investors have the rights to
convert ordinary shares

Hybrids – convertibles Hybrids – Warrants

• Give the holder the right • An option to buy shares

to convert to ordinary at a specified point in the
shares future for a specified
• Have elements of equity (exercise) price.
and debt • The holder has the option
• Provide immediate to buy the share.
finance at low cost
• Self-liquidating
 redemtion value = 105 (include premium)
conversion value = Po(1+g)^(5) * R select the best one , so we select
=4*(1.07)^(5) * 20 = 120.20 conversion value

in here we calculate with pv by 10% and 15% for getting possitive and negative NPVs
at last the calculate IRR = 11.4%

there fore Kd = 11.4%

Equity finance – Ordinary shares

1 Ownership of
the business.

2 Voting rights

3 Pays a variable dividend, ranked

last at the time liquidation

4 Right to participate in any new

issue of shares
Raising equity

Internally- Rights issues New external

generated funds share issues –
– retained placings, offers
earnings for sale, etc.
keep the balance amt in retained
earnings, after pay divident to
share holders
Rights issues
A rights issue is an offer to existing shareholders to subscribe for new shares, at a discount
to the current market value, in proportion to their existing holdings.

TERP - Theoretical ex-rights price

Babbel Co, which has an issued price total

capital of 2 million shares, having a already 2 2-70. 5.40
current market value of $2.70 each, right 1 2.10. 2.10
makes a rights issue of one new share
3 7.50
for every two existing shares at a
price of $2.10.
TERP =7.50/3 = 2.50 shares
The value of a right
Value of a right = theoretical ex rights price – issue (subscription) price

price total
Babbel Co, which has an issued capital of 2 already 2 2-70. 5.40
right 1 2.10. 2.10
million shares, having a current market
value of $2.70 each, makes a rights issue of 3 7.50
one new share for every two existing shares
at a price of $2.10. TERP =7.50/3 = 2.50 shares
value of right = 2.5-2.1 = 0.4
What is the value of the right in Babbel Co?
What is the value of the right in Babbel Co value of the right in babbel co per existing share =
per existing share? $0.4/ 2 Nos = $0.2
Shareholders’ options
take up the offer
(1) Take up their rights by buying the specified proportion at the price offered
(2) Renounce their rights and sell them in the market
(3) Renounce part of their rights and take up the remainder
(4) Do nothing.
Preference shares Pays a fixed dividend, ranked
1 before Ordinary shares at the
time liquidation

2 Dividends are cumulative unless

otherwise stated

For gearing purposes, usually

3 considered to be debt

4 Hybrid form of finance

 Venture capital
This is the provision of risk bearing capital to companies with high growth potential –
generally start-up and late stage growth finance for small companies.

1 It is high risk investment

most of the case venture case invested in

equity instrument itself
2 Not passive portfolio investment

3 Medium-term investment
 Management credibility
Venture capital - Assessment

Technical abilities
Financial
outlook

Venture
capital

Depth of market
research Degree of influence
in Board

Exit route
Finance – leasing

Long-term finance – leasing

• One lease exists for the whole useful

life of the asset though may be a
primary and secondary period.
• The lessor does not retain the risks
or rewards of ownership.
• Lessee responsible for repairs and
maintenance.
• The lease agreement cannot be
cancelled. The lessee has a liability
for all payments.
 the raising of fund is very difficult
because of these problems

Small and medium-

sized enterprises short loan also
(SMEs) Hard to obtain
High failure
• Unquoted private companies rate so hard to medium term
• Owned by a small number of Making banks loans due to
raise external
individuals reluctant to mismatching of
finance
• Not micro businesses lend maturity of
Few assets and
shareholders so liabilities
hard to raise
internal finance
SMEs - Sources of finance

Sources of
finance Government
Business solutions
angels
Crowdfunding

• Owner financing
• Overdraft financing •AreFinancial
wealthyassistance
individuals
• Bank loans •whoOffer taxdirectly
invest incentives
in for
The funding of a project
• Trade credit investors
small businesses.
by raising money from a
• Equity finance •• Increase
Informalthe
market
• Business angel large number of people.
• marketability of shares
Business angels
• Venture capital e.g.small
generallyfirm
havemarkets
• Crowdfunding industry knowledge
• Government
Solutions
 Islamic Finance – Main Principles
Investment should also have a social and an ethical benefit to wider
society beyond pure return.
Wealth must be generated from legitimate trade and asset-based
investment. (The use of money for the purposes of making money is
expressly forbidden.)
All harmful activities (haram) should be avoided.

Risk should be shared.

Islamic sources of finance

Ijara-- -–Venture
Musharaka
Sukuk
Murabaha
Mudaraba Leasing
(Bonds)
(trade capital
– (Equity)
credit or
loan)
Musharaka
Mudaraba
Islamic bonds relationship
is a special
(or sukuk) kindare between
of two
partnership
linked to
Whether
The
or more
where
an key operating
distinction
parties,
underlying
one partner or
whogives
asset, finance
between
contribute
such a transaction,
murabaha
that acapital
money tosukuk to
another
in
aandijara
business,
for
holder the
a loan islessor
is aand
investing that astill
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divide
partial
it in owns
the
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owner inthe
a murabaha,
net assetand
profit
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incurs
bank
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underlying risk
take
rata.
investment ofproviders
assetsownership.
Allactual
comesandconstructive
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profit capitallessor
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first
responsible
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entitled
partner to forismajor
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participate
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the are
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ratios, while the
loss is borne
Profits shared byaccording
each partner to astrictly
pre-agreedin
proportion
contract. to their respective capital
contributions.
Losses solely attributable to the provider
of the capital.
 Sources of finance

Short term Long term

sources sources
• Overdrafts • Equity Finance for Islamic
• Bank Loan • Debt SME Finance
• Trade Credit • Venture
• Operating Capital
Lease • Leasing