In a Nutshell (V). Finance (I)

SOURCES OF FUNDS
There are many sources of funds available to businesses; however, not all of them are equally appropriate to all businesses at all times. These different sources of finance carry very different obligations, responsibilities and opportunities for profitable business.
Despite the esoteric names – debentures, convertible loan stock, preference shares – businesses have access to only two fundamentally different sorts of money:

• Equity, or owner's capital, including retained earnings, is money that is not a risk to the business. If no profits are made, then the owner and other shareholders simply do not get dividends
• Debt capital is money borrowed by the business from outside sources; it puts the business at financial risk and is also risky for the lenders. In return for taking that risk they expect an interest payment every year, irrespective of the performance of the business.
• High gearing is the name given when a business has a high proportion of outside money to inside money. High gearing has considerable attractions to a business that wants to make high returns on shareholders' capital. Companies with high gearing more long-term liabilities than shareholder equity are considered speculative.

Banks are the principal, and frequently the only, source of finance for 9 out of every 10 unquoted businesses. Firms around the world rely on banks for their funding. Bankers are looking for asset security to back their loan and provide a near-certainty of getting their money back. They will also charge an interest rate that reflects current market conditions and their view of the risk level of the proposal.

'five Cs' of credit analysis:

• Character: Bankers lend money to borrowers who appear honest and who have a good credit history.
• Capacity: This is a prediction of the borrower's ability to repay the loan.
• Collateral: Bankers generally want a borrower to pledge an asset that can be sold to pay off the loan if the borrower lacks funds.
• Capital: Bankers scrutinize a borrower's net worth, the amount by which assets exceed debts.
• Conditions: Whether bankers give a loan can be influenced by the current economic climate as well as by the amount.

Banks usually offer three types of loan:

• Overdrafts: Though technically short-term money as they can be called in at a moment's notice, these tend to form a part of the permanent capital of a business, albeit a fluctuating one.
• Term loans: Offered for set periods.
• Government-backed loans: These are available to some types of business, usually small or new ventures, where the banker's normal criteria might not be met, but the government would like to encourage the sector.

Bonds, debentures and mortgages are all kinds of borrowing with different rights and obligations for the parties concerned.
There are other asset backed financiers:

• Leasing companies
• Discounting
• Factoring