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Accounting and Finance
An Introduction
Tenth Edition
Part 3
Financial management
Chapter 15
Financing a business
Copyright © 2020, 2016, 2014 Pearson Education, Inc. All Rights Reserved
LEARNING OUTCOMES
You should be able to:
Identify the main sources of finance available to

a business and explain the advantages and
disadvantages of each
Outline the ways in which share capital

may be issued
Explain the role and nature of the

Stock Exchange
Discuss the ways in which smaller businesses

may seek to raise finance
Figure 15.1 Major internal sources of finance
Short-term Long-term
Reduced
Retained
inventories
earnings
levels
Total
Delayed payment
internal
to trade payables
finance
Tighter
credit control
Figure 15.2 Major external sources of finance
Ordinary shares Finance

leases
Preference Long- Hire-purchase

shares term agreements
Borrowings Securitisation of
assets
Total finance
Debt
factoring
Bank Short-
overdrafts term Invoice
discounting
Figure 15.3 The risk/return characteristics of sources
of long-term finance
Return
Ordinary
shares
Preference
shares
Borrowing
Risk
Loan capital and risk
Lenders may reduce the risk of lending by
Requiring security
(fixed or floating charge on assets)
Including covenants in the loan contract
Loan covenants
May deal with such matters as:
Financial statements
Other borrowings
Dividend payments
Liquidity
Types of loan capital
Term loans
Loan notes
Eurobonds
Deep discount bonds
Convertible loan notes
Mortgages
Figure 15.4 Benefits of finance leasing
Ease of
borrowing
Main Improved
Cost
benefits cash flows
Flexibility
Figure 15.5 Asset finance (new business) provided by
FLA members, 2008–2017
30 32
30
£ billion
29 29
26
23
20 22
21 21
20
10
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: Finance and Leasing Association (FLA) Annual Review 2018, page 14, www.fla.org.uk.
Figure 15.6 The hire-purchase process
Customer
Regular
Asset payments
Initial
delivered made over
deposit
(4) HP time (5)
(2)
agreement
(1)
Supplier Financial
institution
Asset purchased and
paid for immediately (3)
Figure 15.7 The securitisation process
Assets Asset–backed
transferred bonds issued
SPV
Income from Interest paid
assets on bonds
Figure 15.8 The debt-factoring process
Goods supplied on
credit
(1)
Client Credit
business customer
Factor Factor
pays 80% invoices Customer
Factor pays 20% to client credit pays
balance to immediately customer
client (less fees) amount
(3) (2) owing
when credit
customer pays to factor
amount owing (4)
(5)
Factor
Figure 15.9 Client sales revenue (UK sales): invoice
discounting and factoring, 2011–2017
Invoice discounting
275
Sales revenue £m
Factoring
250
262,448
256,429
256,415
254,701
225
235,827
213,495
200
203,800
175
150
125
100
75
19,525
18,569
19,643
18,953
19,506
18,483
18,335
50
25
0
2011 2012 2013 2014 2015 2016 2017
Source: Chart constructed from data published by the Asset Based Finance Association, www.abfa.org.uk.
Long-term v short-term borrowing
Issues that should be taken

into account include:
Matching
Flexibility
Refunding risk
Interest rates
Figure 15.10 Short-term and long-term financing
requirements
Total
funds Fluctuating Short-term
(£) current assets finance
Long-term
Permanent finance
current assets
Non-current
assets
Time
Figure 15.11 Common methods of share issue
Common
Rights issue Placing
issue methods
Bonus Offer for Public

issue sale issue
Reasons for a rights share issue
There is no dilution of control
Costs are lower when offering shares to

existing shareholders
The Stock Exchange
Two important roles
Primary market
Secondary market
Stock Exchange listing
Advantages for a business
Easier to raise funds
Funds acquired at lower cost
Raises profile
Shares valued in an efficient manner
Broadens investor base
Enables other businesses to be acquired

by shares rather than cash
Can help attract and retain employees

(share incentives)
Stock Exchange listing (Continued)
Disadvantages for a business
Cost (including management time)
Increased regulatory burden
Close monitoring of actions and decisions
Pressure to perform well over short-term
Figure 15.12 Beneficial ownership of UK shares
at 31 December 2016 Rest
55 54
%
50
12
10
10
8
5
5
3
2 2 2
1 1
Pension funds
Unit trusts
institutions
Private
Other financial
non-financial
Individuals
Rest of the
world
Banks
Investment
trusts
Public sector
Charities
Insurance
companies
companies
Source: Ownership of UK Quoted Shares (2017), Office for National Statistics, 29 November 2017.
Figure 15.13 Distribution of AIM listed companies by
equity market value
Equity capital – exit routes
Share buyback
Share listing
Business sale
Providing equity finance for the small business
Venture capital
Business angels
Crowdfunding
Providing non-equity finance for the small business
Credit cards
Peer-to-peer lending
Government assisted
loans
Figure 15.14 External financing of
small businesses (2017/18)
18
Per cent
16
14
12
10
Loans/equity
family, friends
from directors,
other third
Loans from
parties
Leasing or hire
purchase
mortgage
Bank loan/
commercial
Invoice
finance
Credit cards
overdraft
Bank
Grants
Source: British Business Bank 2017/18 (2018), ‘Small business finance markets (February). Used with permission.

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Accounting and Finance

Identify the main sources of finance available to

Outline the ways in which share capital

Explain the role and nature of the

Discuss the ways in which smaller businesses

Ordinary shares Finance

Preference Long- Hire-purchase

Lenders may reduce the risk of lending by

Including covenants in the loan contract

May deal with such matters as:

Deep discount bonds

Convertible loan notes

Issues that should be taken

Bonus Offer for Public

There is no dilution of control

Costs are lower when offering shares to

Two important roles

Easier to raise funds

Funds acquired at lower cost

Shares valued in an efficient manner

Broadens investor base

Enables other businesses to be acquired

Can help attract and retain employees

Disadvantages for a business

Cost (including management time)

Increased regulatory burden

Close monitoring of actions and decisions

Pressure to perform well over short-term

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