Page 450 - Business Principles and Management

Chapter 16 • Financing a Business

If the company increases the number of shares of stock by selling new shares,
it must share earnings with a greater number of shareholders. For example, when
the number of shareholders increases from 2,000 to 2,500, the distribution of
$130,000 in dividends changes from $65 per share ($130,000/2,000) to $52 per
share ($130,000/2,500). The original owners may not wish to give up any of
their profits or voice in management unless it is profitable to do so. An increase
in shareholders would need to be offset by an increase in earnings.

CHECKPOINT
What can a business do to obtain capital when faced with high
interest rates?

Sources of Outside Capital

When a business decides to obtain capital, it must find sources willing to pro-
vide the financing. Some common sources of capital are shown in Figure 16-6.
The particular source a business selects depends, in part, on such factors as the
amount of capital needed and the risk involved. Companies with a poor perfor-

FIGURE 16-6 There are many sources of capital that should be
considered by businesses.

Sources of Capital

1. Banks and related financial firms (the most popular source of
outside capital)
2. Small loan companies (firms that lend money to individuals and
businesses that may involve more risk than other lenders might
accept)
3. Venture capital firms (companies that lend large sums of money to
promising new or growing businesses)
4. Commercial credit companies (companies that lend money on current
assets, such as accounts receivable and notes receivable)
5. Sales finance companies (used primarily when installment sales are
involved; these firms purchase installment sales contracts)
6. Insurance companies (portions of funds collected from policyholders
may be loaned to firms)
7. Individual investors and investment groups
8. Pension funds (retirement funds collected from employees may be
loaned to firms)
9. Investment banking organizations (firms that specialize in selling
new security issues to the public)
10. Equipment manufacturers (firms that do not actually lend money, but
will sell needed equipment on an extended-time payment plan)

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