Assume that you have recently joined a family owned renewable energy company in the UK and your first task is to advise the board on appropriate funding sources to secure the 100m that the company requires to fund a new investment project.
You have been asked to provide a report detailing the various funding sources available to the company to secure this level of funding. You have been further advised that the existing owners are all engineers
and as such your report should also include a glossary of terms.
Presently the firm has no debt and the shares of the firm are held privately by five brothers each holding 20% each. All of the brothers recognize the need to secure outside funding but are naturally nervous about the potential dilution of power. Note further that this may just be the initial round of funding and the owners are keen on options that provide subsequent access to funding at a later date.
Essentially the firm has to choose between debt and equity. However there are many different variants of each of these funding options. In addition to this it is no longer the case that a company would float on the stock exchange closest to where they are geographically located (see recent cases of luxury brands "floating" in Asia). In addition both options offer different characteristics regarding subsequent capital raising and their role in management motivation and incentive.
Your assignment should demonstrate the following qualities:
1. An in depth understanding of the available funding opportunities facing the company. These should be supplemented by examples.
2. Recognition of the issue of the reduction in "power" and how this could be mitigated.
3. Recognition of the pro's and con's of debt versus equity with regard to on-going funding.
4. Acknowledgement that both debt and equity comes in a variety of different forms. Again, these should be supplemented by examples.
5. Written in such a manner that a non-subject specialist (such as an Engineer could understand)
6. An understanding that market for IPO's has become a global one. Again, supplemented by examples.
7. An understanding of the potential role in each of these in funding channels in motivating management (if any).
8. Clear evidence of personal research and links to real world examples.
Since the firm is privately held, with five brothers each holding 20% of company's shares, securing funds for new investment project can take place through many ways. In the future too, there could be requirement for financing depending on the size of the project and stages of expansion. The current situation with the firm utilizes cash flow that is generated within the business as the primary source of finance. The firm is satisfied with its funding choice and is not willing to look for alternative sources of funding. There is evidence to support that there are three behavioral barriers for this position. These are:
- Lack of awareness for alternative sources of finance
- Lack of financial expertise required to assess the appropriateness of alternate sources for a borrower
- Lack of confidence in their ability to secure alternative forms of finance
There are different options available in the market which can help the company secure funds, apart from traditional methods.
- Asset-based Finance
Asset-based finance (ABF) can help the firm raise finance against the value of its assets. This product can help improve cash flow of the company and help support the growth. It could be beneficial for the firm at different stages of growth.
- Mezzanine Finance
Mezzanine finance is a form of debt with characteristics of equity but has ranking below senior debt. This type of funding option can be useful in product development, penetration of new markets, strategic merger and acquisition plan. This option could be looked by the firm in the long term when other sources of finance fail to provide the required growth.
- Peer to peer lending
This is a new and efficient way to provide firm with finance. New technologies allow individual investors and businesses to lend directly to borrowers without traditional financial intermediaries such as banks.
Other than above options, three most widely practiced funding options are debt, equity and convertible debt. Debt capital is the money raised by a company that must be repaid over a period of time with interest. It could be short-term or long-term depending on business requirement. Equity is the money raised by a company in return for a share of ownership in the company. Convertible debt is a combination of debt and equity and involves favorable interest rate and other terms on the loan in return for the option to convert some part of debt into equity at ...
The advise board on appropriate funding sources are examined.