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 (FinancialTimes, 2008)
1.1.1. Government
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
4.3. Recommendation
Section-5: References
Objectives and Research Themes
The primary objective of this report is to analyze and categorize the various sources of capital available to businesses, specifically focusing on their suitability for financing working capital. It investigates the merits, drawbacks, and financial implications of different funding methods while assessing how management decisions regarding capital structure impact organizational survival and success in challenging economic environments.
- Classification of internal and external financing sources.
- Comparative analysis of debt versus equity financing.
- Evaluation of capital structure theories and agency problems.
- Real-world application via case studies of UK bank bailouts.
Excerpt from the Book
2.4.1. Internal Financing
The term internal financing representing the earnings accumulated over a certain period of time. It can be explained as the process of putting aside a portion of profit generated over a time period with the intention of making investment in the company’s fixed assets or to meet the working capital requirements (Damodaran, 2010). It is also known as the Self-financing (because the company relies on the Internal source to finance its working capital) or the Ploughing back of Profits (because the company is in the position of retaining the earnings with the purpose making reinvestment in the current business).
Summary of Chapters
Section-1: Aims & Objectives: This chapter introduces the context of financial capital as a necessity for business operations and outlines the project's purpose of examining various funding sources to aid managerial decision-making.
Section-2: Literature Review: This section provides a theoretical framework for capital structure and agency theory, followed by a comprehensive categorization of internal, security, loan, and other financing methods.
Section-3: Case Study: This chapter examines the 2008 UK banking sector bailout, analyzing how different institutions (RBS, Lloyds, HBOS, and Barclays) approached their funding requirements during a crisis.
Section-4: Discussion & Conclusion: This section synthesizes the findings, emphasizing the risks of relying on a single source of capital and concluding that a balanced approach to debt and equity is essential for enterprise stability.
Section-5: References: Provides a comprehensive list of academic sources and industry reports used to substantiate the analysis of corporate financial practices.
Keywords
Financial Capital, Working Capital, Internal Financing, Debt Financing, Equity Financing, Capital Structure, Agency Theory, Retained Profit, Ordinary Shares, Preference Shares, Debentures, Venture Capital, Trade Credit, Factoring, Bank Loans
Frequently Asked Questions
What is the fundamental purpose of this research?
The report aims to identify and evaluate various sources of capital that businesses can employ to finance their working capital, weighing the merits and costs associated with each.
What are the central themes discussed in this work?
The core themes include capital structure theory, agency problems between shareholders and management, and the practical evaluation of different financing instruments like retained earnings, shares, loans, and leases.
What is the primary research question?
The research investigates how financing decisions are critical to business operations and in what manner management can evaluate these decisions to ensure they cover all aspects of the firm's financial needs.
Which scientific methodology is employed?
The study utilizes a review of existing financial literature and theories, combined with a comparative case study analysis of major UK banks during the 2008 financial crisis.
What topics are covered in the main section?
The main sections cover the definitions and comparative analysis of internal financing, security financing (shares/debentures), loan financing, and other specialized sources like factoring and trade credit.
Which keywords best characterize this document?
Key terms include Financial Capital, Capital Structure, Agency Theory, Working Capital, Equity Financing, Debt Financing, and Corporate Bailout.
How did the Royal Bank of Scotland (RBS) and Lloyds TSB differ from Barclays in their financing strategy during the 2008 crisis?
RBS and Lloyds TSB accepted government bailout packages involving the issuance of preference shares and increased state control, whereas Barclays sought to raise funds through private investors to avoid government intervention.
Why does the author caution against relying on a single source of capital?
The author argues that relying on one source is risky, as it reduces financial flexibility and may force the company into unfavorable repayment terms or crisis situations if market conditions shift unexpectedly.
- Citation du texte
- Junaid Javaid (Auteur), 2013, Sources of capital and funding strategies for businesses, Munich, GRIN Verlag, https://www.grin.com/document/281640
