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would normally bear。 The buyer of the bond receives a return by the
gradual appreciation of the bond’s price in the marketplace。 This could
be an a。。ractive financing strategy for a business making an investment
which itself will not bear fruit for a number of years。
。 Junk bonds are bonds usually subordinated to； that is； put below others
in the pecking order of who gets paid in tough times； other regular
bonds。 Such bonds carry a higher interest burden。
。 Callable bonds are used when an issuer wants to retain the option
to buy back their bonds from the public if general interest rates fall
sharply a。。er the issue date。 The issuer notifies bondholders that a。。er
a certain date no further interest will be paid； leaving the holders with
no reason to keep the bond。 The pany issuing the bond can then go
out to the market and launch a new bond at a lower rate of interest and
so lower its cost of capital。 This process is also known as refinancing。
Finance 59
ASSET…BACKED FINANCIERS
The banks are more covert when it es to looking for security for money
lent。 Two other major sources of funds are less circumspect； indeed their
whole prospectus is predicated on a precise relationship between what
a business has or will shortly have by way of assets； and what they are
prepared to advance。 Both groups play an important role in financing
growing businesses。
Leasing panies
Physical assets such as cars； vans； puters； office equipment and the
like can usually be financed by leasing them； rather as a house or flat may
be rented。 Alternatively； they can be bought on hire purchase。 This leaves
other funds free to cover the less tangible elements in your cash flow。
Leasing is a way of ge。。ing the use of vehicles； plant and equipment
without paying the full cost all at once。 Operating leases are taken out
where you will use the equipment （for example a car； photocopier； vending
machine or kitchen equipment） for less than its full economic life。 The
lessor takes the risk of the equipment being obsolete； and assumes
responsibility for repairs； maintenance and insurance。 As you； the lessee；
are paying for this service； it is more expensive than a finance lease； where
you lease the equipment for most of its economic life and maintain and
insure it yourself。 Leases can normally be extended； o。。en for fairly nominal
sums； in the la。。er years。
Hire purchase differs from leasing in that you have the option to eventually
bee the owner of the asset； a。。er a series of payments。 You can find
a leasing pany via The Finance and Leasing Association （fla 》
For Businesses 》 Business Finance Directory）； which gives details of all UKbased
businesses offering this type of finance。 The website also has general
information on terms of trade and code of conduct。
Discounting and factoring
Customers o。。en take time to pay up。 In the meantime you have to pay those
who work for you and your less patient suppliers。 So； the more you grow；
the more funds you need。 It is o。。en possible to ‘factor’ your creditworthy
customers’ bills to a financial institution； receiving some of the funds as
your goods leave the door； hence speeding up cash flow。
Factoring is generally only available to a business that invoices other
business customers； either in its home market or internationally； for its
services。 Factoring can be made available to new businesses； although its
services are usually of most value during the early stages of growth。 It is
60 The Thirty…Day MBA
an arrangement that allows you to receive up to 80 per cent of the cash
due from your customers more quickly than they would normally pay。 The
factoring pany in effect buys your trade debts； and can also provide a
debtor accounting and administration service。 You will； of course； have to
pay for factoring services。 Having the cash before your customers pay will
cost you a li。。le more than normal overdra。。 rates。 The factoring service will
cost between 0。5 and 3。5 per cent of the turnover； depending on volume of
work； the number of debtors； average invoice amount and other related
factors。 You can get up to 80 per cent of the value of your invoice in advance；
with the remainder paid when your customer se。。les up； less the various
charges just mentioned。
If you sell direct to the public； sell plex and expensive capital equipment；
or expect progress payments on long…term projects； then factoring
is not for you。 If you are expanding more rapidly than other sources of
finance will allow； this may be a useful service that is worth exploring。
Invoice discounting is a variation on the same theme where you are
responsible for collecting the money from debtors； this is not a service
available to new or very small businesses。 You can find an invoice discounter
or factor through The Asset Based Finance Association （
thefda。uk/public/membersList。asp）； the association representing the
UK’s 41 factoring and invoice discounting businesses。
EQUITY
Businesses operating as a limited pany or limited partnership have a
potentially valuable opportunity to raise relatively risk…free money。 It is riskfree
to the business but risky； sometimes extremely so； to anyone investing。
Essentially this type of capital； known collectively as equity； consists of the
issued share capital and reserves of various kinds。 It represents the amount
of money that shareholders have invested directly into the pany by
buying shares； together with retained profits that belong to shareholders
but which the pany uses as additional capital。 As with debt； equity
es in a number of different forms with differing rights and privileges。
Ordinary shares form the bulk of the shares issued by most panies
and are the shares that carry the ordinary risks associated with being in
business。 All the profits of the business； including past retained profits；
belong to the ordinary shareholders once any preference share dividends
have been deducted。 Ordinary shares have no fixed rate of dividend； indeed
over half the panies listed on US stock markets pay no or virtually
no dividend。 These include high…growth panies such as Google and
Microso。。； which argue that by retaining and reinvesting all their profits
they can create be。。er value for shareholders than by distributing dividends。
A pany does not have to issue all its share capital at once。 The total
Finance 61
amount it is authorized to issue must be shown somewhere in the accounts；
but only the issued share capital is counted in the balance sheet。 Although
shares can be partly paid； this is a rare occurrence。
Preference shares get their name for two reasons。 First； they receive their
fixed rate of dividend before ordinary shareholders。 Second； in the event of
a winding up of the pany； any funds remaining go to repay preference
share capital before any ordinary share capital。 In a forced liquidation this
may be of li。。le fort； as shareholders of any type e last in the queue
a。。er all other claims from creditors have been met。
Class A and Class B shares are cases where categories of shareholder
are singled out for more or less favourable treatment。 For example； class
A shares are o。。en given up to five votes per share； while class B gets one。
In extreme cases class B shareholders can get no votes at all。 panies
will o。。en try to disguise the disadvantages associated with owning shares
with fewer voting rights by naming those shares。 One of the most famous
examples was their use by the Savoy Hotel Group to ward off an unwanted
takeover by Trusthouse Forte。 While Trusthouse was able to buy 70 per cent
of Savoy shares on the open market； they could secure only 42 per cent of
the voting rights as they were only able to buy class B shares； the A shares
being in the hands of the Savoy family and allies。
Reserves； a typically misleading term in all accounting； means profits
of various kinds that have been retained in the pany as extra capital。
Also important is what the term reserves does not mean。 It does not mean
actual money held back in reserve in bank accounts or elsewhere。 Reserves
e from retained profits over many years but are reinvested in buildings；
equipment； stocks or pany debts； just like any other source of capital；
and are rarely held in cash。
The main categories of reserves are as follows：
。 Profit and loss account； ie cumulative retained profits from ordinary
trading activities。
。 Revaluation reserves； being the paper…profit that can arise if certain
assets are revalued to current price levels without the assets concerned
being sold。
。 Share premium account； ie the excess over the original par value of a
share when new shares are offered for sale at an enhanced price。 Only
the original par value is ever shown as issued share capital。
SOURCES OF EQUITY CAPITAL
There are two broad sources of equity： private equity； usually put in by
individuals or small groups of individuals who for hopefully the prospects
of greater returns will take on greater risks； or public capital through a
share issue on a stock market。
62 The Thirty…Day MBA
Private equity
There are three