All companies need finance to operate. Finance can be obtained internally (equity finance), that is, capital provided by the owners of the company as shareholders.
Finance can also be obtained externally (debt finance), that is, loans or credit provided by lenders or creditors. Inevitably, finance provided from external sources requires some form of security by way of mortgage or charge.
Equity Finance
For a proprietary company, up to 50 shareholders can get together and provide finance but for a public company, the number of shareholders is unlimited. By providing finance, shareholders retain ownership of the company. The return to shareholders on their investment is by way of dividends. There are different types of shares:
Ordinary shares – a most common form of shares, which can be in different classes with or without voting rights at the annual general meeting
Preference shares – these shares attract fixed annual dividends and have a preference over ordinary shares for dividends and capital in winding
1. Convertible preference shares – these can be converted to ordinary shares after a period of time
2. Cumulative preference shares – if the fixed dividend is not paid in one year, it is paid in the next
3. Participating preference shares – after receiving a fixed dividend, shareholders can also receive a portion of the remaining profit once the ordinary shareholders are paid divided
Contributing shares – these shares are not fully paid and require further payment in the future. The dividend is paid according to the proportion of the paid-up amount
Bonus issues – free shares being issued to existing shareholders in proportion to their shareholding
Rights issues – a right given to existing shareholders to purchase new shares being issued in the company to raise capital
1. Renounceable rights – this can be traded in the stock market if the shareholder does not wish to purchase new shares
2. Non-renounceable rights – this cannot be traded as the right to purchase the new shares lapses after a particular date
