Sport Stock Project



Sport Stock Project

Introduction

When a company is growing rapidly, for example when contemplating investment in capital equipment or an acquisition, its current financial resources may be inadequate. Few growing companies are able to finance their expansion plans from cash flow alone. They will therefore need to consider raising finance from other external sources. In addition, managers who are looking to buy-in to a business ("management buy-in" or "MBI") or buy-out (management buy-out" or "MBO") a business from its owners, may not have the resources to acquire the company. They will need to raise finance to achieve their objectives. (Andreff , 2010)

Financing Options (Equity Financing) Available To Sport Enterprises

There are a number of potential sources of finance to meet the needs of a growing business or to finance an MBI or MBO:

- Existing shareholders and directors funds- Family and friends- Business angels- Clearing banks (overdrafts, short or medium term loans)- Factoring and invoice discounting- Hire purchase and leasing- Merchant banks (medium to longer term loans)- Venture capital

A key consideration in choosing the source of new business finance is to strike a balance between equity and debt to ensure the funding structure suits the business.

The main differences between borrowed money (debt) and equity are that bankers request interest payments and capital repayments, and the borrowed money is usually secured on business assets or the personal assets of shareholders and/or directors. A bank also has the power to place a business into administration or bankruptcy if it defaults on debt interest or repayments or its prospects decline.

In contrast, equity investors take the risk of failure like other shareholders, whilst they will benefit through participation in increasing levels of profits and on the eventual sale of their stake. However in most circumstances venture capitalists will also require more complex investments (such as preference shares or loan stock) in additional to their equity stake.

The overall objective in raising finance for a company is to avoid exposing the business to excessive high borrowings, but without unnecessarily diluting the share capital. This will ensure that the financial risk of the company is kept at an optimal level. (Neale, 2010)

Debt vs. Equity Financing

In order to expand, it is necessary for business owners to tap financial resources. Business owners can utilize a variety of financing resources, initially broken into two categories, debt and equity.

What does Equity Financing mean?

The act of raising money for company activities by selling common or preferred stock to individual or institutional investors. In return for the money paid, shareholders receive ownership interests (share capital) in the corporation.

What Does Debt Financing Mean?

When a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise that the principal and interest on the debt will be repaid. (Andreff , 2011)

Advantages of debt compared to equity

Because the lender does not have a claim to equity in the business, debt does not dilute ...