SourcesofFunds2


In this post we discuss the use of different kinds of shares in raising capital for your business idea. Enjoy

Ordinary Shares

These are issued to equity investors during either public or private offerings. They form the backbone of a company’s financial structure and represent the risk capital of the company. There is no fixed dividend to ordinary shareholders of the company, however a dividend is distributed if profits remain after lenders and preference shareholders have been paid. Ordinary shares can impact financing flexibility through decisions to withhold capital for expansion and growth if need be. Zimbabwean banks used this method during the financial crisis from 2004-2005 they passed the need for dividend distribution, resulting in capital preservation.

Ordinary shareholders have limited loss liability based on their equity holdings. They do exercise control over the company through voting rights and the power to elect or remove directors. The potential returns to these shareholders are unlimited, depending only on the growth of the company.

Preference Shares

Preference shares offer lower risk because they have a fixed rate of dividend per year if there is sufficient profit. They are paid prior to ordinary shares. Cumulative preference shares provide the shareholder the right to receive dividends in arrears for the years that were not profitable. Non-cumulative preference shares do not accumulate. Participating preference shares enable the investor to receive further portions of profits after receiving the fixed rate due to their preference shares when ordinary shareholders have received their dividend. Redeemable preference shares allow the venture to buy back its shares from the investors at some agreed future date. Being low risk investments, these carry a lower dividend as compared to non-redeemable shares. Both Kingdom and Royal Banks used these at some point in their financing strategy. With time Kingdom abandoned the strategy, citing the significant constraints and control issues that arise out of preference shares. This is because Kingdom executives seem keen on maintaining control.

Debentures

These are long term loans evidenced by a trust deed. They are divided into units and investors are invited to purchase as many units as they may require. The debenture loan may be redeemable or irredeemable. The investor receives interest from the loan.

Debentures and other forms of long term loans may be convertible into the venture’s shares. From an investor’s perspective this hedges against risk when investing in start ups.

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7 thoughts on “SourcesofFunds2”

  1. This feels like a business class where we receive top notch lectures not only from an academic but a business man who walks the talk. l am so excited about this doc. l am going to apply this information to my own business..oh yes doc my own business.

    1. Thanks Revo. That is the point . We would like to see you apply it in your business. I have realised that success does not come from understanding concepts but from applying them. Applying what you are learning is key. Another interesting discovery I made recently is so simple and yet profound: If you study economics you become an economist, if you study engineering you become an engineer BUT studying entrepreneurship does not make you an entrepreneur. Starting an entrepreneurial business makes you an entrepreneurs. So its in the application of concepts that entrepreneurs are made. Go for it.

  2. They say practise makes perfect and I agree! Am so glad that I’m part of what God is doing thru you! Keep directing us……our teacher, our mentor!

  3. I found myself here after clicking a link on meetingdestiny’s blog.I realize l have moved from one form of inspiration to another.l love your lectures.thanks

    1. Thanks Tanya. I trust that you will find some of the material usable enough to inspire you to try it out. Success is in the doing. Thanks for visiting. You are welcome on our site anytime. The MeetingDestiny blog is a hit. I am proud of the author. So inspirational.

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