BUSINESS FINANCE Share certificate is a negotiable bearer document that

Business finance can be defined as the amount of money shows the units of ownership of a company. It is issued to a
resource required to establish, grow and run a business buyer of shares of a company as an evidence of part-
organization. It is otherwise known as corporate or ownership of the company. The buyers of the shares are
enterprise finance. called shareholders. It is otherwise known as stock, which
Types of Business finance contains the number of shares held by the owner.
1. Short-term business finance: It is the amount of Types of share capital
money resources required to run a business 1. Authorized share capital: It is the maximum
organization within a short period of time of amount of share capital that is approved for a
usually in less than a year. company to raise through issuing of shares.
2. Medium- term business finance: It is the amount 2. Issued share capital: It is the proportion of the
of money resources required to run a business authorized share capital that is actually advertised
organization within an intermediate period of in a company’s prospectus for public
time of usually between a year and ten years. subscription.
3. Long-term business finance: It is the amount of 3. Subscribed share capital: It is the proportion of
money resources required to run a business the issued share capital that the members of the
organization for a long period of time of usually public are willing to buy.
more than ten years. 4. Called –up share capital: It is the proportion of
Sources (Instruments) of business finance the subscribed share capital that a company calls
A. Internal sources of business finance: It is for, for actual payment.
otherwise called internal financing or self- 5. Paid-up share capital: It is the proportion of the
financing instruments: called-up share capital that the members of the
1. Personal loans public actually paid for.
2. Ploughed back profit 6. Reserved share capital: It is the proportion of
3. Reserved provision for depreciation the called-up share capital that is left after the
4. Partners’ contributions paid-up share capital is taken care of.
5. Recovered provision for bad debt Methods of Issuing Shares
6. Proceeds from assets disposal 1. Public Issue: This involves contracting out the
7. Personal savings sale of shares to merchant banks or issuing
B. External sources of business finance: houses, which help a company to sell the shares
1. External loans at certain charges (brokerages). It is usually
2. Overdraft adopted when a company is willing to sell new
3. Trade credit shares, called the Initial Public Offer (IPO).
4. Taxes These shares sold through this method are said to
5. Subsidies and grants be sold in the primary market.
6. Subvention 2. Offer for Sale: This involves outright sale of the
7. Royalties, rate, rent, fees, licenses and fines entire shares of a company to underwriters
8. Insurance policy (Merchant banks), which plan to sell the shares to
9. Tax holiday and rebate the members of the public.
10. Hire purchase, Leasing and Factoring 3. Right Issue: This involves the sale of shares of a
11. Mortgage company to existing willing shareholders of the
12. Issue of bondslaa company alone.
13. Issue of debentures 4. Private Placement: This involves the sale of
14. Issue of shares shares directly and secretly to pre-selected
CONCEPT OF SHARES investors without the knowledge of the general
A share is an indivisible unit of the financial stock or public.
capital of a company. It is also a unit of ownership of a 5. Issue by Tender: This involves the sale of shares
company. to the highest tenderer i.e. the buyer who quotes
A share capital is the financial capital of a company that is the highest price at which to buy the share.
expressed or denominated in terms of share. It is when the Types of shares
financial capital or stock of financial capital is converted to 1. Deferred shares: They are those equity securities
shares, that it becomes a share capital. It is therefore a unit meant for early owners, founders or investors of a
of the share capital that is referred to as a share. company. The deferred shareholders’ dividends
 are not fixed. The holders of those shares are 3. Convertible debentures: They are those, which
entitled to vote at the AGM of the company. can be converted to equity securities, such as
shares.
2. Ordinary shares: They are those equity 5. Redeemable debentures: They are those, which
securities meant for investors after the deferred can be redeemed by the company at the pre-
shares. The ordinary shareholders’ dividends are determined price and time in the nearest future on
not also fixed, but they earn dividends before the the basis of the terms and conditions.
deferred shareholders. The holders of those 4. Perpetual debentures: They are those, which do
shares are entitled to vote at the AGM of the not have any maturity date. They are also known
company. They are regarded as part-owners of as irredeemable or irretrievable debentures.
the company. They are also known as common CONCEPT OF BONDS
shares. A bond is a negotiable bearer debt IOU security,
3. Preference shares: They are those equity which is usually secured, and makes the holders to be
securities meant for investors who earn fixed entitled to a fixed rate of interest from the issuer. The
dividends before the ordinary shareholders are issuer of the security (document) is called the debtor
paid. They are not entitled to vote at the AGM of while the buyer (holder) of the document is called the
the company. They are also known as preferred creditor.
shares. Components of Bonds
Types of preference shares 1. Coupon rate: It is the annual fixed rate of
1. Cumulative preference shares: They are those, interest paid on the bond. It is the percentage of
whose holders are entitled to arrears of unpaid the face value of a bond.
fixed dividend in a previous year in the current 2. Coupon: It is the annual amount of interest paid
year as well as the current year fixed dividend. on a bond.
Before the ordinary shareholders are paid. 3. Par value: It is the face value (price) of a bond.
2. Participating preference shares: They are 4. Bond yield: It is the annual amount of interest
those, whose holders are entitled to additional paid on a bond, depending on the face value of
dividend from the left-over profit of the the bond in the year.
company, aside the fixed dividend from the 5. Maturity: It is the fixed time at which the bond
current year profit, after all other equity and debts expires for payment of its principal.
securities holders have been paid. Types of bonds
3. Redeemable preference shares: They are those, 1. Treasury bonds: They are those issued by the
which can be redeemed by the company at the central bank on behalf of the federal government.
pre-determined price and time in the nearest 2. Municipal bonds: They are those issued by both
future on the basis of the terms and conditions. the local and state governments.
4. Convertible preference shares: They are those, 3. Corporate bonds: They are those issued by
which can be converted to ordinary shares. public companies.
CONCEPT OF DEBENTURES Problems of Business finance
A debenture is a negotiable bearer debt IOU security, 1. Inadequate collateral securities: When a business
which may be secured or unsecured, and makes the firm does not have the required adequate
holders to be entitled to a fixed rate of interest from collateral securities, meant to obtain long term
the issuer. The issuer of the security (document) is loans from commercial banks, it will be difficult
called the debtor while the buyer (holder) of the for the firm to raise the necessary finance in
document is called the creditor. meeting its needs.
Types of Debenture
1. Floating debentures: They are those, which are 2. High rate of interest : If the charges on loans to
not secured with any collateral security. They are be obtained from commercials banks by business
otherwise called unsecured debentures, naked firms are too much, the firm will likely be
debentures, and simple debentures. discouraged to obtain the loan, which will hinder
2. Mortgage debentures: They are those, which it from getting the required finance for its
are secured with collateral securities. They are business.
otherwise known as secured debenture or simply 3. Low expected rate of return: If the rate of
bonds. rewards on bonds for investors is low, the
investors will likely buy less of the bonds, which
 will not enable the firm issuing the bonds to
realise the expected amount of finance.
4. Poor credit score : When a business firm has a
poor history of paying back its loans to its
previous creditors, the firm will find it difficult to
raise the required finance from other potential
creditors.
5. Unfavourable policy of the government: If the
policy of the government does not support the
giving of loans to certain business firms, such
firms will not be able to raise finance through
loans.
6. Low per capital income