Company Finance
Where does company money come from?
Shareholders and directors
Banks
Venture capital (businesses, insurance companies, pension funds, banks, or wealthy individuals
looking for investment in companies which have the potential for fairly rapid growth, in the
hope that such companies will float as public companies, which will enable the venture
capitalists to sell their investment and realise substantial capital gain)
o Investment in ordinary shares in the company, the stake will be a substantial one but
not normally majority stake since such a surrender of control would usually be
unacceptable to the individuals running the company
o Part of the investment may be in the form of debt finance
o The venture capitalist may require that there are management changes in the company,
incl. seat on the board for its representatives
o Before investing, will carry out a thorough investigation into the company’s business,
finances, management and future prospects
Other sources (esp. for debt finance) - e.g. Funding Circle (online marketplace that allows
investors to lend directly to approved small businesses in the UK)
Equity or debt finance?
In practice, most companies raise money from a mixture
Advantages Disadvantages
Equity finance For the investor: For the investor:
Shareholder has certain rights Tightly controlled by CA 2006
within the company (incl. attend More risk for investor – if the
GM and vote = have influence company does badly, the investor
over direction of company) loses the initial investment and
Value of the investment (share) will not receive dividends (which
may increase, depending on is not a consistent income
company’s performance because it depends on how well
the company is doing)
For the company: o Even if there are
Dividends are payable only if sufficient profits,
company makes a profit directors have the
discretion not to pay
dividends (depending on
type of share)
No set date for repayment of
capital – will only get capital if
company is wound up (BUT. Can
recoup investment by selling it to
a third party)
Shareholder's right to realise
capital investment by selling
, shares to third party is usually
restricted
o Art.26(5) MAs – directors
have total freedom to
refuse to register a new
shareholder
Value of share may decrease
Cost of equity is harder to pin
down – constitutes the likely
returns to the new shareholder
(incl. dividends, capital
appreciation and share buybacks)
o These returns are the
cost to the existing
shareholders, as their
share of future dividends
or capital growth is
decreased by the
presence of an extra
shareholder
For the company:
Dilutes control of existing
shareholders (may no longer be
able to block a special resolution)
o BUT. N.B. pre-emption
rights
Payment of a dividend isn’t a
deductible expense for the
company = simply a distribution
of profit, after it has paid
corporation tax
Expectation that dividends will
increase if company does well
Debt finance For creditor: For creditor:
Governed by contract law and is No ownership rights and thus no
otherwise loosely controlled = say in the company
more flexible source of funds Capital value of the debenture
Less risky: remains the same and there is no
o Interest payments are a possibility of it increasing
contractual liability
which must be met For company:
regardless of how well Due to poor economic climate,
the company does (I.e. banks are very reluctant to lend
will be paid before money to businesses
dividends) May be especially difficult to
o Loan is usually secured obtain more debt finance if the
, over company’s company already has a lot of debt
property and there may (high ‘gearing’), and may make it
be personal guarantees less attractive for potential
from directors = lender investors
is must more likely to Articles may restrict company’s
get paid if company ability to borrow
becomes insolvent Terms of existing facility
Set date for repayment of agreements may restrict the
capital sum loaned taking of new loans or debt, at
If lender wishes to realise his least without consent of existing
capital earlier than the lender
repayment date agreed, he may Debt and interest payments must
sell his debenture to be made, regardless of
whomsoever he chooses company’s performance
(provided someone wants to
buy it)
Capital value of a debenture
remains constant – removes risk
of it decreasing
For the company:
Payment of debenture interest
is a deductible expense of the
company = reduces corporation
tax liability
Interest doesn’t increase if
company does well
Cost of debt is relatively easy to
establish – it's the interest rate
charged
o Debt is currently
cheaper because of the
record low interest rates
No dilution of control
Company Finance – SHARES
Issuing shares (equity finance)
Where does company money come from?
Shareholders and directors
Banks
Venture capital (businesses, insurance companies, pension funds, banks, or wealthy individuals
looking for investment in companies which have the potential for fairly rapid growth, in the
hope that such companies will float as public companies, which will enable the venture
capitalists to sell their investment and realise substantial capital gain)
o Investment in ordinary shares in the company, the stake will be a substantial one but
not normally majority stake since such a surrender of control would usually be
unacceptable to the individuals running the company
o Part of the investment may be in the form of debt finance
o The venture capitalist may require that there are management changes in the company,
incl. seat on the board for its representatives
o Before investing, will carry out a thorough investigation into the company’s business,
finances, management and future prospects
Other sources (esp. for debt finance) - e.g. Funding Circle (online marketplace that allows
investors to lend directly to approved small businesses in the UK)
Equity or debt finance?
In practice, most companies raise money from a mixture
Advantages Disadvantages
Equity finance For the investor: For the investor:
Shareholder has certain rights Tightly controlled by CA 2006
within the company (incl. attend More risk for investor – if the
GM and vote = have influence company does badly, the investor
over direction of company) loses the initial investment and
Value of the investment (share) will not receive dividends (which
may increase, depending on is not a consistent income
company’s performance because it depends on how well
the company is doing)
For the company: o Even if there are
Dividends are payable only if sufficient profits,
company makes a profit directors have the
discretion not to pay
dividends (depending on
type of share)
No set date for repayment of
capital – will only get capital if
company is wound up (BUT. Can
recoup investment by selling it to
a third party)
Shareholder's right to realise
capital investment by selling
, shares to third party is usually
restricted
o Art.26(5) MAs – directors
have total freedom to
refuse to register a new
shareholder
Value of share may decrease
Cost of equity is harder to pin
down – constitutes the likely
returns to the new shareholder
(incl. dividends, capital
appreciation and share buybacks)
o These returns are the
cost to the existing
shareholders, as their
share of future dividends
or capital growth is
decreased by the
presence of an extra
shareholder
For the company:
Dilutes control of existing
shareholders (may no longer be
able to block a special resolution)
o BUT. N.B. pre-emption
rights
Payment of a dividend isn’t a
deductible expense for the
company = simply a distribution
of profit, after it has paid
corporation tax
Expectation that dividends will
increase if company does well
Debt finance For creditor: For creditor:
Governed by contract law and is No ownership rights and thus no
otherwise loosely controlled = say in the company
more flexible source of funds Capital value of the debenture
Less risky: remains the same and there is no
o Interest payments are a possibility of it increasing
contractual liability
which must be met For company:
regardless of how well Due to poor economic climate,
the company does (I.e. banks are very reluctant to lend
will be paid before money to businesses
dividends) May be especially difficult to
o Loan is usually secured obtain more debt finance if the
, over company’s company already has a lot of debt
property and there may (high ‘gearing’), and may make it
be personal guarantees less attractive for potential
from directors = lender investors
is must more likely to Articles may restrict company’s
get paid if company ability to borrow
becomes insolvent Terms of existing facility
Set date for repayment of agreements may restrict the
capital sum loaned taking of new loans or debt, at
If lender wishes to realise his least without consent of existing
capital earlier than the lender
repayment date agreed, he may Debt and interest payments must
sell his debenture to be made, regardless of
whomsoever he chooses company’s performance
(provided someone wants to
buy it)
Capital value of a debenture
remains constant – removes risk
of it decreasing
For the company:
Payment of debenture interest
is a deductible expense of the
company = reduces corporation
tax liability
Interest doesn’t increase if
company does well
Cost of debt is relatively easy to
establish – it's the interest rate
charged
o Debt is currently
cheaper because of the
record low interest rates
No dilution of control
Company Finance – SHARES
Issuing shares (equity finance)
