MONASH

BUSINESS

Companies’ sources of funds

Accredited by: Advanced Signatory:

LEARNING OBJECTIVES
When you have completed your study of this lesson, you
should be able to:
1. Identify different types of business ownership
2. Identify and explain the main features of companies
3. Explain equity and borrowings in a company context
4. Explain
the restrictions rights of shareholders regarding
drawings or reduction in capital
SOURCES OF FUNDS FOR COMPANIES
• Internal – sources that do not require the approval of
others apart from managers or directors to obtain,
e.g. retained profit

• External – requires the approval of shareholders,

e.g. issue of new shares, borrowings

• Long-term – expected to provide finance for at least one year

• Short-term – typically for less than one year (bank overdraft)

ORDINARY SHARES
• Shares represent the basic units of ownership of the
business

• Ordinary shares are the main risk-bearing shares issued

by companies. High-risk investment for shareholders.

• Ordinary shareholders’ returns come from distributions of

profit, called dividends

• Voting rights

• Limited loss liability, unlimited return potential

 PREFERENCE SHARES
• Some companies issue preference shares

• These shares have a fixed rate of dividend that must be paid

before any ordinary dividend can be paid

• Often preference shares have higher priority than ordinary

shares in the event of the company going into liquidation

• Preference shares usually do not carry voting rights.

• Lower risk than ordinary shares (from investors’

perspectives)
LONG-TERM BORROWINGS

• Most companies borrow to supplement the funds

raised from share issues and retained profit

• Specified interest rate, term and repayment schedule

• Borrowings may be in the form of:

o Long-term loans (usually secured on assets of the

company)

o Loan notes (for e.g. debentures or corporate

bonds)
SHORT-TERM SOURCES OF FINANCE

Bank overdraft

• Flexible form of borrowing that allows a business to have a

negative current account balance

• Size of credit limit can be varied depending on

requirement

• Relatively easy and inexpensive to arrange

• Security is generally required

• Repayable on demand from lender