Sources and Instruments of Business Finance

Sources and Instruments of Business Finance
Long term Sources of Finance
The Sources of long term funds available to companions are:
1. Ordinary shares and reserves (Equity).
2. Preference Shares.
3. Debenture and other types of loan stock.
4. Convertible loan Stock
5. Warrants.
6. Share Options.
7. Leasing.

ORDINARY SHARES (EQUITY)
Ordinary Shares are shares issued to the owners of the company that is the share holders of the company. ordinary share holders bear the risk of failure and reap the profits of success of a company. They are paid divides when the company makes profit. On liquidation of the company, they are entitled to receive their shares of any liquidated assets of the company after all debts and prior charges of the company have been paid off.
Ordinary shares holders are entitled to voting rights and can control the decision of the company technically by opportunity the directors, who will carryout their wishes. Moreover, the extent to which powerful shareholders might try to influence the director’s of the company vary with circumstances and from company to company.

Script issue or Bonus issue
Script or Bonus issue is a Conversion of equity reserves into issued share capital. By creating more shares in this way a bonus issue does not raise new funds, but has the advantage of making shares cheaper and more easily marketable on the stock exchange.

PREFERENCE SHARES
This is shares that have a fixed percentage dividend before any dividend is paid to the ordinary share holders. As with ordinary shareholders, preference dividend can only be paid if sufficient profits are available. Preference shares are in various types and features they are as follows.

1. CUMULATIVE PERFERENCE SHARES
With cumulative preference shares, the right to an unpaid dividend is carried forward to later years. The arrears of dividend on cumulative preference shares must be paid before any dividend is paid to the ordinary shareholders.
2. PERTICIPATIVE PERFERENCE SHARES
These have a fixed, often cumulative, minimum annual dividends plus an additional variable dividend which is related to that payable on the ordinary shares. The holders are normally entitled to participate in any surplus on winding up. The share holders of preference shares are not regarded as part owners of a company.

LOAN STOCK
This is a long term debt capital raised by a company for which interest is paid. Usually half yearly and of a fixed rate. The holders of a loan stock are known as long term creditors to the company.

DEBENTURES
These are a form of loan stock. It is a document which acknowledge or creates a debt due from a company. Debenture may be unsecured or secured.

CONVERTIABLE LOAN STOCK
Convertible loan stocks are fixed return securities (usually debenture but at times preference shares) that allows their holders to convert them to the ordinary shares of the company at a predetermined rate.

WARRANTS (OR SUBSCRIPTION RIGHTS)
This is a right given to an investors or, shareholder by a company which is beneficial to him/her; it is given on its loan stock allowing him to buy new shares of the company at a future date at a fixed pre- determined price. The main aim of it is to make the new issues of loan stock more attractive.

SHARE OPTIONS
These are shares options given by a company to their holders the right to subscribe for new ordinary shares of a predetermined price, at a certain date in future. When options are exercised, the company will issue new shares for cash. A company may as well issue share options as a way of rewarding employees.

LEASING
This is a rental agreement that extends for a year or more and involves series of regular payments. finance lease are possible source of long-term finance for a company that chose to acquire some of its fixed assets under lease agreements, finance leases are lease agreements between the user of the leased asset (ie the lessee) and a provider of finance (ie the lessor) for the use of the assets by the leases in return for lease rentals to the lessor.

CAPITAL MARKET
Capital Market is a market that is made to raise and investing long-term funds. Long-term means a period of about five years and more. Capital market can be sub-divided into two, primary and secondary market. Primary market is where new shares are offered to the public to subscribe which is known as initial public offer while secondary market is a second hand market to say, existing issues are sold here.