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6. FUNDING THE BUSINESS I. II. 1. gearing What sources can an entrepreneur go to in order to start up a new business?

Match the following words and phrases connected to sources of funds with the definitions given:

a. share capital or capital contributed by shareholders in the company 2. equity b. loan arranged for a large organization or government by a lending bank with other banks participating 3. syndicated loan c. Fund set up for a pension plan. 4. security d. A commercial bank that is part of a network of banks that can clear checks for its clients regardless of whether or not the check originates from the same commercial bank. 5. clearing bank e. The ratio of a company's long-term funds with fixed interest to its total capital. A high gearing is generally considered very speculative. 6. merchant bank f. the general term for all stocks, shares and bonds 7. pension fund g. risk capital 8. government h. Unsecured debt backed only by the integrity of the borrower, not subsidy by collateral, and documented by an agreement. 9. debenture i. large amount of money collected from different investors and managed by an investment company or bank 10. venture capital j. money provided from the nations current account to enable companies or other recipients to operate without loss 11. fund k. British term for an investment bank/ in the U.S., an investment bank which is well-equipped to handle multinational corporations. III. Read the following text and then complete the chart:

To ensure a companys long-term survival and prosperity, finance managers need to make decisions about the gearing of the company. Gearing is the relationship between equity capital invested in the business and long-term debt. The higher the gearing (in other words, the greater the proportion of long-term debt), the more exposed the company is in times of economic difficulty. The first form of equity is the owners capital. This is the most exposed form of capital since a return is received only after all other calls on a companys profits have been satisfied. In an extreme case bankruptcy the owners equity will be repaid only after everyone else, including employees, creditors, banks etc., has received what they are owed. On the other hand, in successful times, the owners have a claim on all the net profit of the company. An owner does not need to rely entirely on his or her own funds. S/he can go to other sources of equity finance. There are three main sources: firstly venture capital: this is usually provided by venture firms interesting in financing high-growth companies. However, the provider usually demands a much faster and higher rate of return than an

owner would expect from his/ her own capital. On the other hand, the venture capital company does not usually interfere in the running of the company. Another source of equity finance is the unlisted securities market sometimes called the second or third market. This has the advantage of allowing a company to raise money from outside investors without losing much control of the company. The last source is available only to large companies - the Stock Exchange. If a company gains a listing on the Stock Exchange, this will provide the long-term opportunity of raising capital by issuing fresh shares. However, at least 25% of the equity must be in public hands thereby reducing the control of the original owners. Companies prepared to increase their gearing can raise capital through long-term loans. They can go to sources such as clearing banks, merchant banks and even pension funds. However, in all three cases they will usually secure their debt over the fixed assets of the business and, of course, interest must be paid, usually linked to bank base rate. In times of prosperity, a high gearing will give the owners a much better return as net profits will be a much higher percentage of equity even after payments on the long-term debt. However, in harder times, the owners earnings will drop dramatically as interest payments soak up most of the companys profits. Sources of funds Low gearing Advantages/ Disadvantages

High gearing


Which word or phrase from the documents above fits each of these definitions? 1. middleman between clients and stock traders or dealers; 2. long-term investment traded on the stock market, which usually has a fix rate of interest for a fixed period;

3. the rate of interest used by individual commercial banks as a basis for their lending rates 4. the owner's rights to the property (assets) of the business; also called proprietorship; 5. the ratio of money gained or lost (whether realized or unrealized) on an investment relative to the amount of money invested; also known as rate on investment; 6. a sum of money demanded. V. Use the verbs to form nouns and adjectives where possible: To survive To prosper To go bankrupt To provide To interfere To invest To secure To earn To own To rely To earn To pay To profit VI. Find the word missing in each of the following sets of three sentences. 1. The estimated ..potential is very important when you are choosing an investment project This project will yield .of $800,000 over five years. The amount of money an employee receives and the money generated from an investment project are both known as .. 2. They want to know the expected ..on investment. Some projects will be rejected because they do not yield a high rate of . The on an investment is the profit you get from it. 3. The ..expenditure in the canteen, sports centre and staff room will benefit the whole company. In ten years, we should be able to recover the invested. The total amount of money which is invested by the owners of a company is known as .. 4. What is the ..period of this investment likely to be? Theyll have to be prepared to wait longer for a ..from this investment. Recovering the costs of an investment is known as . 5. ..of future inflation rates have not been taken into consideration. The actual economic life of the assets turned out to be longer than the original . .

Statements about what is expected in the future are . VII. Choose the correct answer in each of the following: 1. Funds coming into a firm are known as of funds. a. springs; b. sources; c. origination; d. income. 2. The way these funds are used are known as the . a. application; b. delegation; c. disposal; d. consumption. 3. .funds include money in our hands and in the bank. a. working; b. current; c. profit; d. cash. 4. When you take away current liabilities from current assets you have the amount of funds. a. liability; b. working capital; c. asset; d. flow. 5. Financial statements about cash funds are usually known as ..statements. a. cash flow; b. cash resource; c. cash outflow; d. cash loss. 6. An item which does not involve flow of funds is .. . a. sale of fixed asset; b. drawings; c. depreciation; d. loan repayment. 7. An item which involves flow of funds is .. . a. provision for bad debts; b. book loss on sale of fixed asset; c. sale of fixed asset; d. book profit on sale of fixed asset. 8. After making adjustments for items which dont involve the flow of funds, the net profit or loss is known as .. . a. gross profit; b. outflow of funds; c. cash movements; d. total generated from operations. 9. If a company reduces their stock and the number of debtors, they will a. deliver; b. release; c. discharge; d. liberate.