Sources of Finance

You have a great idea for a business but need money to make it happen.  Where can you obtain finance?  What terms will be attached?  What source of finance would be best?  These are just some of the questions that come tumbling out when you are looking to get a business started.

There are some of you approaching “Sources of finance” from the perspective that you want to do well in exams.  There is nothing wrong with this approach.  My advice is that you read the 3 pages contained in your Financial Management 8th edition textbook (pages 13-41 to 13-43).  Johnathan Dillon is the Head of MAF at NMMU and has written some brilliant advice in those pages.  To find out more about Prof Dillon, click here to read why he was chosen as one of the top 35 CA(SA)s under 35.  He gives you practical advice on what to look for when comparing different financing options and also how to apply these to a particular exam scenario.

There are then some of you approaching “Sources of finance” from the perspective that you want to start a business one day.  This is awesome.  South Africa needs entrepreneurs that want to establish businesses and create jobs.  I hope these resources inspire you:

  1. How to start a startup.  This is a video series of the Y Combinator Stanford course that has launched many top businesses.  You can listen to free podcasts or watch the lectures here.  Dropbox, Airbnb and Reddit all got started here.
  2. Watch Dragon’s Den and Shark Tank.  These reality shows highlight young businesses pitching for finance.  Get inspired!
  3. Consider multiple sources of finance.  Besides banks, consider other sources of finance.  In South Africa there is Industrial Development Corporation, Business/Partners, National Empowerment Fund and many other government grants.

Some aspects of sources of finance that I find interesting:

  1. Don’t be quick to issue equity.  Facebook paid a painter with shares, and when Facebook listed, the painter got close to $200m!  Wow!
  2. A large portion of acquisitions are made possible due to debt.  Manchester United is a classic example of this.  These debt fuelled deals are often also conducted by Private Equity companies like Brait (who bought Virgin Active gyms in 2015) and Ethos (who recently listed on the JSE).
  3. Matching your investments and your financing cash flows is vital.  Sol Kerzner got it wrong when he financed the luxury resort Atlantis with short-term debt.  He lost a large chunk of his empire in 2011 as a result – a brilliant businessman suffering due to a poor financing decision.
  4. Large companies are getting incredible debt terms at the moment.  Unilever (think Dove soap and Hellmann’s mayonnaise) just raised money for 8 years at an interest rate of 0.7% (that is NOT 7%, it is 0.7%!).  AB Inbev was also able to easily raise $47 billion in January 2016 to help pay for its acquisition of SABMiller.  The order book was the largest ever at $110 billion, so they were 100% oversubscribed!
  5. Negative interest rates are a real thing.  Who would ever think that this would happen – investors are getting paid less than they are investing?  Japan, Germany, Sweden and Denmark all have negative interest rates now.  This has resulted in some strange behavior.  For instance, in Switzerland now you get penalised for paying tax early!  To see the great variety in global interest rates, click here.

As with most finance topics, Aswath Damodaran has awesome resources that will take your curiosity further.  Click here for some great slides that he uses in the classroom.  Let me know if you have questions or comments on this fascinating area.

Paul Maughan

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