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Choosing Between Debt Or Equity Finance

The reality is that most businesses will require a capital injection at some stage in their business life-cycle. By Gareth Owen

Sasfin

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Businesses tend to trade in cycles. Assuming an existing business model makes sense, there is generally an initial investment in the form of a shareholder or bank loan followed by a growth phase.

Once this growth phase matures, a further investment is necessary to achieve continued growth, either in the form of a working capital injection, or a property plant and equipment improvement, in order to avoid a growth plateau.

One size does not fit all

The size and scale of an investment required may vary depending on the life stage of the business.

While it may be sufficient to fund this expansion through the balance sheet initially, it is inevitable that a larger investment will be required, which usually entails a cash injection from an external source.

This can come in the form of either debt or equity capital. For the growth phase to be implemented successfully, it is crucial to understand which source of funding is suitable for the business at the time of the capital injection.

Related: The Myriad Benefits Of Venture Capital Investing

Unpacking finance through debt

Debt financing can be the quickest and easiest means for the cash injection, however it does come with some downside. Making use of a debt facility will result in term repayments as well as interest, sometimes at hefty rates depending on the loan size and term.

This will likely have a negative effect on cash flows in-the-short-to-medium-term, raising the break-even point which immediately removes the possibility for debt finance for businesses which are near break-even point or whose trade tends to be cyclical.

However, because there is no change in shareholding, the returns at the maturity of the growth phase, once the debt has been paid off, will not be diluted.

In the case of cash flows not being a concern, the interest expense incurred in conjunction with the loan can also be used to reduce the company tax owed to the taxman.

The case for equity finance

Equity financing, where the cash injection is received in exchange for a relative shareholding in the business can be useful in unlocking far more value than debt under the right circumstances.

While debt can quickly accommodate a short-to-medium-term growth phase, the long-term benefits of finding the right equity partner can prove to be invaluable in achieving the businesses’ long-term growth plans, often by leveraging the new business partner’s synergistic business attributes.

Related: Determining The Value Of Your Business

The downside to equity financing is that the initial returns will be diluted as the new shareholder will be entitled to their portion of the earnings, however if one takes care to select the correct partner and advisor, the long-term returns of an equity partner can far outweigh the initial earnings dilution.

Partnering with the right adviser to determine the best source of external funding can ensure a positive outcome in the critical growth phase of a business.

Sasfin Corporate Finance focuses on providing innovative commercial and banking solutions to our clients. As an accredited sponsor and designated advisor with the JSE, we offer our sponsor and designated advisor clients independent advice on a full range of corporate finance transactions including advice relating to continuing obligations in terms of the JSE Listings Requirements. Sasfin Capital is a division of Sasfin Bank Limited, a subsidiary of Sasfin Holdings which listed on the JSE in 1987

Company Posts

Public Private Partnerships Can Work For Entrepreneurs

Property Point will develop 16 small business in the property sector of which two thirds are youth and women owned.

Property Point

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In a landmark partnership for collective economic growth in South Africa, the Department of Small Business Development (DSBD) joined forces with Property Point, a Growthpoint Properties initiative, to develop more small businesses for South Africa’s property sector. DSBD has allocated a R5 million grant to Property Point for a one-year small business development programme as part of its Enterprise Incubation Programme (EIP). This breakthrough initiative is the first public-private partnership of its kind in the property sector. It will develop 16 small businesses in the property sector of which two thirds are youth and woman-owned.

For  this  unique  16-business  intake,  Property  Point’s  programme  is powerfully market driven. It will raise the profile of the entrepreneurs and strengthen their competitiveness, with a deep focus on market integration. The programme aims to create market linkages for these small businesses that will see them included in procurement opportunities in the broader property sector, as well as Growthpoint. It is expected to set new benchmarks for small business integration into private sector supply chains.

Related: 4 Black-Owned Businesses Participating in This Enterprise Development Programme That Are Growing – Fast

Estienne de Klerk, CEO of Growthpoint South Africa, says: “We believe in the principles of social and economic transformation and empowerment on all levels, and we are committed to achieving this. As a hands-on property owner, we own and manage our buildings – we recognise our unique position to develop small businesses to increase their access to market opportunities. We are proud to contribute to this pioneering public-private partnership designed to deliver on South Africa’s transformation, small business, economic growth and job creation objectives.”

Shawn Theunissen, head of Property Point and head of Corporate Social Responsibility for Growthpoint Properties, says:

“Property Point’s  objective  has  always  been  to  contribute  to  South  Africa’s economic growth. Using a best practice model, we have delivered positive results in our new partnership with government. This will escalate our impact on transforming the economy at a crucial time when South Africa is dealing with high unemployment and low economic growth.”

The beneficiaries of the Property Point and DSBD partnership have advice on how other entrepreneurs can make the most out of similar programmes:

Advice from Zoleka Ngema of Senzee Trading

zoleka

Contact www.senzee.co.za.

  • Be honest this helps you define your position and helps you view the real issues in your business.
  • Do every task diligently every business is different and what works for one might not work for you, so working diligently personifies the tasks and therefore adds value to your business.
  • Lessons are continuous remember & do the tasks done as these will create a cycle of growth even after the course is over.

Related: Want To Start A Property Business That Buys Property And Rents It Out?

Advice from Sibongile Shikwambana of Sandwind Coatings

sibongile-shikwambana

Contact www.sandwind.co.za.

  • Be fully present, participate and take advantage of every single opportunity
  • Drive your own business agenda; recognise that you and no one else can make your business successful
  • Build and maintain meaningful relationships.

Advice from Teko Motlhabi of Techmo Air

teko-motlhabi

Contact www.techmoair.com

  • Try to be present and involved with all the activities and opportunities handed to you
  • Ask for help from the Programme Managers and the rest of the team when you need it
  • Create relationships with your fellow entrepreneurs and collaborate.

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Business Landscape

How SMPs Can Support Businesses Looking To Internationalise

Key findings from a new global research report from ACCA suggest Small and Medium Sized Accounting Practices (SMPs) recognise many of the key challenges and opportunities that internationalising SMEs face in today’s global economy. This provides them with an excellent platform towards providing additional value-added support to clients.

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Much has been written in recent years about how SMPs are experiencing a growing number of commercial challenges that are disrupting the client services they have traditionally relied upon for revenue.

Equally, many have argued that more SMPs need to consider whether diversification into new advisory services could be the key towards the sector’s future success. However, such change can be difficult when talent flows in the sector are uncertain and competition is fierce.

Whilst not appropriate for everyone, ACCA was therefore interested to explore whether international trade is one area where SMPs’ unique experience and expertise might lead to the development of new service provision.

Our findings suggest that many SMPs are equipped with an excellent platform towards providing additional value-added support to clients. However, despite SMPs stating that most of their clients had been involved in some form of international activity over the last three years, their current provision of relevant support remains highly focused around a small number of limited areas.

The new report, Growing Globally – How SMPs can support international ambitions, also revealed the following about internationalisation and the relevant advice landscape for SMEs. 

Although the research was global, specific findings from five key markets have also been extracted and presented. These markets are Ireland, Malaysia, Nigeria, Singapore and the UK. They were selected on the basis of their representation of markets in various stages of economic development, and their global and regional importance to international trade.

SME internationalisation today

  • Just under half (45%) of SMEs said the main benefit of internationalisation was access to new customers in foreign markets. Increased profitability (35%), faster business growth (33%) and access to new business networks (30%) followed.
  • Both SMEs and SMPs considered ease of doing business and high growth potential as the most important factors when choosing an export destination. Geography was seen as less important, which may be a result of new technologies reducing its significance as a perceived barrier.
  • Both SMEs and SMPs recognised foreign regulations as the most significant barrier to internationalisation. For SMEs, the second most important was competition (27%) though for SMPs it was foreign customs duties.
  • In terms of the future, SMEs’ international ambitions are focused on building the capacity of their business (45%), building networks in foreign markets (45%) and introducing or developing more products and services to market (44%).

Related: Technology In Accounting – Race For Relevance

The advice landscape

  • A wide breadth of professional advice and support is used by internationalising SMEs, who tend to reach out to different sources as they move along their internationalisation journeys. Government or relevant public agencies (39%) are the most widely used source of professional advice, closely followed by lawyers (35%) and then banks (33%).
  • Accountants are most likely to be used by SMEs when looking for support on international tax, regulatory compliance, foreign exchange and accessing external finance.
  • Only 9% of SMPs said they had no clients who had been involved in any international trade activities over the last 3 years. Importing and exporting activities were the most common, as was participating in broader international supply chain networks.
  • SMPs mainly rely on internal and informal resources when advising clients about internationalisation. However, this gradually shifts towards a reliance on more external and formalised resources as practices grow in employee size.
  • Just under half (47%) were not members of any networking organisation, potentially missing out on valuable resources that could enable the development of more effective forms of international support.

Using these findings, ACCA conducted a series of interviews and roundtables with SMPs and SMEs globally. The subsequent insights were used to develop recommendations on how practices can look to develop their international advisory provision.

  • Specialisation is key – For those developing their international advisory provision, it is vital to first identify an area of the market where you believe your practice has the opportunity to effectively develop its expertise, resources and intelligence to best suit the needs of your clients. SMEs’ demands for international advice vary according to sector and size of business. Building a market focus is more likely to make any future expansion of international support more achievable and successful.
  • Adopt a strategic mindset – Identifying where you could best add value in terms of international support requires SMPs to think strategically and embark on initial planning and research. The best place to start is with existing clients rather than prospective ones, as they provide a readily accessible (and more approachable) evidence base to explore where demand is likely to be greatest. Making efforts to understand your clients’ internationalisation needs can then help you shape your wider international advisory offering.
  • Expand your international network – Networks are integral for the development of new professional advisory services but particularly with regards to internationalisation. This is because global value chains often necessitate close and efficient coordination of activities between businesses. SMPs should therefore aspire to become the central referral point for clients looking to find the most appropriate source of professional advice.
  • Invest in professional development – Practices must have highly skilled staff with the appropriate intellectual knowledge for clients to recognise the value in the services offered. Creating a structured programme of learning activities for staff around international trade could be useful for SMPs looking to upscale their international advisory provision. This could involve introducing formal learning activities across more technical areas of international trade (such as tax, compliance and foreign exchange) as well as working with other firms to develop knowledge networks where staff can learn, collaborate and access good practice.

Related: Investing In Value Creation Tools Can Help Your Business Grow

As SMEs continue to seek new ways of engaging in international trade, partly brought about by developments in technology, practices are being presented with opportunities to develop and widen their international advisory provision.

For some SMPs providing additional support to clients involved in international markets will not be feasible or practical. Nonetheless it is important for all practices to continue recognising the changing realities of how SMEs are operating globally.

The key challenge in taking advantage of such opportunities is centred on the risks that inevitably come with the business model optimisation required to provide new and relevant client services.

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Company Posts

Digital Options With Olymp Trade – Online Trading Made Simple

Remember that communicating with others makes progress easier, so feel free to share with your fellow-traders any time and increase chances of your success!

Olymp Trade

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Innovation in trading  – is gain without pain possible?

In our modern age, trading has helped a lot of people earn handsomely. However, originally it was a complex exercise, involving a considerable investment of time and financial resources to understand the market. That has restricted its acceptance among people who wish to trade but have a busy schedule and limited budget.

The problem seems to have been solved to a great extent with digital options – a special form of a financial instrument. While it requires relatively less time to learn, it also reduces the risk exposure, which accounts for the growing popularity of digital options. With this type of trading, your investment amount doesn’t have to be equal to the underlying asset’s market price. So, even if the minimum price of a stock index unit is $100, you can take an exposure of just $1 on this.

A platform, which has achieved loyalty of over 16 mln. customers, despite being a late market entrant, is Olymp Trade. The company provides particular ease of use and a comprehensive educational kit, so we will use this example to explain how digital options work.

Related: How Investors Can Take Advantage Of The Rand’s Currency Trading Rates

Olymp Trade – a closer look at digital options

This type of trading requires an investor to anticipate the price movement of the underlying asset in a short term. On the Olymp Trade platform the asset range includes currency pairs, commodities, cryptocurrency, various stock indices and some individual stocks. A trader would then need to place an “Up” or “Down” call relative to the strike price, without having to bother about how far the price would move. You are also required to specify the time limit for keeping the trade open – it is called expiration time, and could last from 1 minute to several hours.

Since there is no need to gauge the extent of movement, analysis of parameters like where to put ‘stop loss’ or when to book profit is not necessary – and this makes the process so much simpler. Profitability per each trade is always known beforehand, and with Olymp Trade it may reach 80-90%. Another essential point is that a trade could be sold back to the market, if the trend behaviour contradicts your forecast. This flexible approach allows to recover some of the invested money, if it’s not possible to lock in profits.

online-trading-1

Developing a strategy that works

Since options is only intraday, fundamental analysis has almost no relevance. As a result, most of the trading happens employing technical charts. Yet, you cannot ignore the opportunity to trade based on news flow, which could actually generate higher returns than technical analysis. So, even if you are not connected with, say, Australia but sudden floods have caused huge supply disruption in the country, you could place a ‘Down‘ trade on AUD. However, one needs to be careful when analyzing the news. For instance, even if the employment figure is higher than last month, the currency could lose sharply – in case it is lower than expectations. Conversely, even if the GDP growth is negative, the currency could see a rebound if it has survived the crisis with minor damage.

The other benefit of news-based trading is that you can earn multiple times with the same news or insight. For instance, if you think dollar is going to rise substantially over the next few hours due to Fed’s move, you can place an ‘Up’ trade with a five-minute time frame. After this trade has expired, you can put another trade with the same ‘Up’ position if your judgment has turned out correctly and you still expect the price trend to continue.

Introducing cryptocurrencies

Another asset class that has gained lot of limelight recently is cryptocurrencies. They are highly volatile – and this is tricky on one hand, but lucrative on the other. Olymp Trade gives you an opportunity to trade in crypto while keeping your risks limited.

Related: Silver-Sphere Trading Gives Top Advice About Investing In (The Right) Precious Metal

Using Olymp Trade for crypto saves you the hassle of opening another account, which is usually time-consuming and involves several verification processes. More importantly, you would have to disclose a lot of personal information, which may not be very attractive proposition because the crypto-industry is still evolving. As for reliability and security, which is vitally important in trading (no matter crypto or traditional assets), Olymp Trade can guarantee it all – the company’s activities are supervised by the International Financial Commission.

The chart below gives an idea of Bitcoin price movement on a typical day. One can see clearly that there is sufficient volatility in the price to make money here.

olymp-trade

While you cannot own or store crypto with Olymp Trade, you can certainly earn from its price movement. The platform offers a dozen different cryptocurrencies to trade, including the top ones like Bitcoin and Ethereum. However, the returns generated for this asset class vary substantially: from 10% to 80%. You also need to note that these returns keep varying all time through. So, if you traded on an asset generating 80% return at a particular time, please confirm the offered returns when placing the next trade – as it may not be the same.

How can I really profit, if I choose trading options?

We have mentioned different trading methods – from the time-tested assets to the modern-day cryptocurrencies – and it only makes the tip of the iceberg.

In order to understand the process more deeply and start profiting, one should have a systematic approach to learning. But of course your self-study should be based on trustworthy sources. We recommend taking a look at the Olymp Trade’s “Education” section, where one can find well-structured lessons and webinars dedicated to trading. The platform provides a free demo account, so the users can put their new skills into practice straight away. The benefit here is working with platform features without depositing real money. Use virtual currency for demo trading, and take as much time as you need before getting ready to open real deals for real profits.

Online trading is a very popular kind of business nowadays. If you visit Olymp Trade page on Facebook, you will find a lot of proof to that, meeting people for whom trading has become one of the main pursuits in life. Remember that communicating with others makes progress easier, so feel free to share with your fellow-traders any time and increase chances of your success!

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