Page 256 - Cambridge IGCSE Business Studies

Cambridge IGCSE Business Studies Section 5 Financial information and decisions

Share issue

This source of finance is only available to limited companies as they are the
KEY TERM

only form of legal structure allowed to raise finance through a share issue.
Share issue: source of The company can offer to sell shares up to a maximum number. This is called

permanent capital available to authorised share capital. Private limited companies can only sell shares to
limited liability companies.
existing shareholders or private investors. Public limited companies can off er

their shares for sale to the general public. The amount of capital raised through
a share issue becomes permanent capital and never has to be repaid unless the
business ceases to trade.
Debt or equity financing for long-term finance?
KEY TERM
Benefits Limitations
Equity finance: permanent Debt financing Does not change the Interest is charged on the
finance provided by the owners of ownership of the company. amount borrowed and this
a limited company. Lenders have no say in the increases business costs.
running of the company. Interest must be paid even if the
business makes a loss.
The amount borrowed must be
repaid.

Equity financing It never has to be repaid. The increase in shareholders
EXPLORE! There is no ongoing cost. If the ‘dilutes’ the ownership of
business makes a loss it does the company. Producing a
Research the financial and

not have to pay dividends to prospectus to offer the shares
254 other support the government
shareholders. for sale is expensive.
provides for businesses in your
country. Your research should Table 19.2 Benefits and limitations of debt and equity financing
consider the type and level of
support available, the purpose of
the grant/support, whether the Government grants
grant has to be repaid and why

the government is providing the The governments of many countries support businesses in their country by

grant/support. providing grants and other financial assistance to encourage new business start-
ups, or to assist business growth and development.

Micro-finance in developing economies
In some parts of the world it is difficult for people with a business idea to
get access to any of the sources of finance outlined above. These entrepreneurs
are often from poor backgrounds so do not have any savings or family or
friends who are able to loan them the money to start their business. Banks and
KEY TERM
other lenders will not lend them the money as they are considered to be too
Micro-finance: small amounts of high risk.
capital loaned to entrepreneurs in In more recent times, mainly thanks to the vision of people like Professor
countries where business finance
Muhammad Yunus, founder and Managing Director of Grameen Bank, micro-
is oft en difficult to obtain. These finance is now available to people wishing to start a business, but who are unable

loans are usually repaid aft er a

to obtain finance from any other source. The loans are often for small amounts and

relatively short period of time.
are typically repaid within six months to a year. Once the loan has been repaid it
then becomes available to other borrowers.