Financial Capital is considered as the superior source of funding required by the firms to begin or to carry its operation. Different theories have been proposed over time to assist managers in making the financing decision. In this regard the Pecking Order theory is the prominent one, which urged the company to give Retained Profit as the first priority whenever the company face the situation to raise capital. Debt is the only attractive alternative which not only supports the company to start and survive but also helps it to expand its operations with the intension of challenging the leaders of the specified industry. The capability of the company to finance its working capital is the major concern which is the main endeavour of finance manager to resolve. It is a essential requirement for the company to settle the account with the supplier of the fund before entering the agreement. The source of capital for Working Capital can be divided in to four main classes (Internal Financing, Security Financing, Loan Financing and other financing sources). It has been understood from the Case Study section, that Royal Bank of Scotland (RBS), Lloyds TSB and HBOS would undergo the Bailout package which would not only give the government the stakes within the Bank but also would permitted them to control and monitor compensation and financial plan closely with the help of their appointed Board of Directors. On the other hand Barclays, which would be hoped to avoid government support is looking more resistant to raise £6.5 Billion through private investor and also would scrapped its year 2008 dividend with the initiative of saving £2 Billion. It has been found out that Royal Bank of Scotland (RBS), Lloyds TSB and HBOS are more interested in going for Security financing in meeting its working capital needs, whereas Barclays is looking enthusiastic for utilising Loan Financing for the purpose of Sourcing of Capital. It has been cleared that only relying on one source of capital would be a risky option for both new & incumbents in any industry. This point may be cleared through the occurrence of situation where the company needed to repay the associated funds acquired from the one specific source sooner than the company’s plans and projections where the company must look for other sources which would not only make possible for the company to meet its working capital needs but also to weaken the supplier of funds power as well.
Table of Contents
- Section-1: Aims & Objectives
- 1.1. Background Context
- 1.2. Problem Statement
- 1.3. Aims & Objectives
- 1.4. Summary
- Section-2: Literature Review
- 2.1. Theory of Capital Structure
- 2.2. Agency Theory
- 2.3. Sources of Capital for Working Capital
- 2.4. Classification of Source of Capital for Working Capital
- 2.4.1. Internal Financing
- 2.4.1.1. Retained Profit
- 2.4.2. Security Financing
- 2.4.2.1. Ordinary Shares
- 2.4.2.2. Preference Shares
- 2.4.2.3. Debentures
- 2.4.3. Loan Financing
- 2.4.3.1. Bank Loans
- 2.4.4. Other Financing
- 2.4.4.1. Lease Financing
- 2.4.4.2. Venture Capital
- 2.4.4.3. Trade Credit
- 2.4.4.4. Advances from the Company's Customers
- 2.4.4.5. Accrued Expenses
- 2.4.4.6. Deferred Income
- 2.4.4.7. Factoring
- 2.5. Summary
- Section-3: Case Study
- 1.1. Case Study-1: Government Bailout Package for UK's Banks (Financial Times, 2008)
- 1.1.1. Government
- 2,1.1.2. Royal Bank of Scotland (RBS)
- 1.1.3. Lloyds TSB & HBOS
- 1.1.4. Barclays
- 1.1.5. Findings
- Section-4: Discussion & Conclusion
- 4.1. Discussion
- 4.2. Conclusion
- 4.3. Recommendation
- Section-5: References
Objectives and Key Themes
The main objective of this report is to examine the sources of capital available to businesses, focusing particularly on working capital financing. The report explores various theoretical frameworks related to capital structure and financing decisions, and then applies these theories to a real-world case study.
- Sources of Capital for Working Capital
- Theories of Capital Structure (Pecking Order Theory)
- Analysis of Financing Decisions
- Case Study: Government Bailout of UK Banks
- Risk Mitigation in Capital Acquisition
Chapter Summaries
Section-1: Aims & Objectives: This section sets the stage by introducing the crucial role of financial capital in business operations, particularly for startups facing challenges in securing funding. It highlights the difficulties faced by entrepreneurs in the initial stages and introduces the Pecking Order theory as a prominent framework for financing decisions, emphasizing retained profits as the primary source, followed by debt and external equity. The section acknowledges the limitations of this theory for new entrants and underscores the importance of debt as an alternative for growth and market competitiveness.
Section-2: Literature Review: This section provides a comprehensive overview of different theories and approaches related to capital structure and sources of capital for working capital. It examines the Pecking Order theory in detail, highlighting its strengths and limitations concerning firms' financing choices. The section then meticulously categorizes sources of capital for working capital into internal financing (retained profits), security financing (shares, debentures), loan financing (bank loans), and other financing (lease financing, venture capital, trade credit, etc.), offering a detailed analysis of each category with numerous examples and insights.
Section-3: Case Study: This section presents a case study analyzing the 2008 government bailout package for UK banks, specifically focusing on the financing decisions made by Royal Bank of Scotland (RBS), Lloyds TSB & HBOS, and Barclays. It contrasts the approaches adopted by these institutions, highlighting the different choices between security financing (RBS, Lloyds TSB & HBOS) and loan financing (Barclays). The analysis examines the implications of each approach, emphasizing the risks associated with relying solely on a single source of capital.
Keywords
Working Capital, Capital Structure, Financing Decisions, Pecking Order Theory, Sources of Capital, Internal Financing, Security Financing, Loan Financing, Debt Financing, Equity Financing, Retained Profits, Case Study, UK Bank Bailout, Risk Management.
Frequently Asked Questions: A Comprehensive Language Preview
What is the main topic of this report?
The report examines the sources of capital available to businesses, with a particular focus on working capital financing. It explores various theoretical frameworks related to capital structure and financing decisions, applying these theories to a real-world case study.
What are the key themes explored in the report?
Key themes include sources of capital for working capital, theories of capital structure (particularly the Pecking Order Theory), analysis of financing decisions, a case study of the government bailout of UK banks in 2008, and risk mitigation in capital acquisition.
What are the main sections of the report?
The report is structured into five sections: Aims & Objectives, Literature Review, Case Study, Discussion & Conclusion, and References. The Aims & Objectives section sets the context and outlines the report's goals. The Literature Review comprehensively explores relevant theories and categorizes sources of capital. The Case Study analyzes the 2008 UK bank bailout. The Discussion & Conclusion section synthesizes findings and offers recommendations. Finally, the References section lists the sources used.
What theories are discussed in the Literature Review section?
The Literature Review section delves into the Pecking Order Theory of capital structure, detailing its strengths and weaknesses in explaining firms' financing choices. It also covers agency theory and provides a detailed classification of sources of capital for working capital, including internal financing (retained profits), security financing (shares, debentures), loan financing (bank loans), and other financing options (lease financing, venture capital, trade credit, etc.).
What case study is analyzed in the report?
The case study examines the 2008 government bailout package for UK banks. It focuses on the financing decisions of Royal Bank of Scotland (RBS), Lloyds TSB & HBOS, and Barclays, comparing their approaches and highlighting the risks associated with different financing strategies.
What are the different categories of capital sources discussed?
The report categorizes sources of capital into: Internal Financing (primarily retained profits), Security Financing (ordinary shares, preference shares, debentures), Loan Financing (bank loans), and Other Financing (lease financing, venture capital, trade credit, advances from customers, accrued expenses, deferred income, factoring).
What are the key findings of the case study?
The case study contrasts the financing choices made by different UK banks during the 2008 bailout. It highlights the implications of relying on a single source of capital and examines the different risks associated with security financing versus loan financing.
What are the overall conclusions and recommendations of the report?
The conclusion section summarizes the findings of the literature review and case study, providing insights into optimal financing strategies for businesses. Recommendations likely address the importance of diversifying capital sources and managing risks associated with different financing options. (Specific recommendations aren't explicitly provided in the provided summary).
What keywords are associated with this report?
Keywords include: Working Capital, Capital Structure, Financing Decisions, Pecking Order Theory, Sources of Capital, Internal Financing, Security Financing, Loan Financing, Debt Financing, Equity Financing, Retained Profits, Case Study, UK Bank Bailout, Risk Management.
- Quote paper
- Junaid Javaid (Author), 2013, Sources of capital and funding strategies for businesses, Munich, GRIN Verlag, https://www.grin.com/document/281640
