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Growth Financing
Introduction to Finance (FIN2303)
Algonquin College
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Growth Financing
Financial Needs and Financing
A key aspect to any business is the area of Financial Planning. A business relies on cash flow not only from the revenue it generates but may also need monies to fund growth opportunities. At the planning stage of a business determinations about expenditure will impact decisions regarding the raising of funds to operate the business. Loans are obtained on the basis of creditworthiness and the purpose of the loan, which means that a worthy small firm is not at a disadvantage. A big firm may also have much larger financial needs than a small firm and thus find financing more difficult to obtain.
Most companies with go through a bank or investment company to borrow monies to fund their business ventures. Small businesses often encounter more obstacles when approaching the major banks for funding and large corporations often seek funds by seeking out investors who wish to invest monies in the business. Venture capitalists are individuals who are looking for investments in hopes of yielding higher return on their money than traditional investment opportunities .A good example of venture capitalist is the Canadian reality series Dragons Den.
Internal vs External Financing
To provide internal financing means those funds for growth and investment will come from within the company. External financing is to go to outside lenders to obtain the funds needed for the company to fulfill its growth goals. There are advantages and disadvantages to both approaches. Companies considering internal and external finance typically start by exploring internal options. They calculate the planned cost of a project to determine if enough money will be available, and think about what kind of position the company may be in during development. One problem with the use of internal funds is that it can stress the company cash flow and possibly create future problems if situations arise in the future and the company does have the cash on hand to deal with the issue.
The risk involved with external financing is that the company is increasing its debt margin and therefore increasing its risk of losing control should financial constraint’s increase in the future. Lenders are very careful about providing financing and companies
Sources of Borrowing
There are several factors to be considered here. The size of the business will often dictates the amount of money required and the length of the term the money is required for. The borrowing needs of a small business will differ substantially from those of larger corporations.
Another factor to be considered is the type of corporation – private or public or as we in Canada refers to as Crown Corporations.
Investors can include but is not limited to the following sources:
- Line of Credit (Chartered Banks)
- Small Business Loan or Grant ( Government\Banks)
- Private Investors –venture Capital ( Dragons Den)
- Institutional Investors ( subsidiaries of commercial banks)
- Government Backed Corporations – Export Development Canada\Farm Credit Canada
Intermediate and Long term financing is most commonly by the means of a load with a financial institution. Intermediate term would be a two to five year loan period. A long term period would be a mortgage could cover a period of up to 25 years.
Types of Risks
Business Risk Financial Risk Instrument Risk
Industry environment Leverage Bonds
Uncertainty Capital structure Mortgage
Economic environment Insolvency Conditional sales contracts
Business variations More debt Unsecured loans
High-tech businesses Finance costs Common shares
The Cost of Borrowing
Calculating the cost of borrowing over a short period of time is critical to the business. This will help determine the total overall costs involved and provide the specifics regarding the payback and the feasibility of the amount being borrowed.
The equation to calculate the annual percentage rate APR for short term loans:
Growth Financing
Course: Introduction to Finance (FIN2303)
University: Algonquin College
