Sources of finance - internal (retained profits); external (debt - short-term: bank overdraft, commercial bills; long-term: mortgage, debentures, unsecured notes, leasing; equity - ordinary shares - new issues, rights issues, placements, private equity); financial institutions; influence of government and global market

What this dot point is asking

NESA wants you to map out the sources of finance available to an Australian business, distinguish internal from external, debt from equity, short-term from long-term, and explain the role of financial institutions, government and the global market in shaping access to finance. Section II often tests the difference between specific debt instruments (overdraft v commercial bill v debenture) or between debt and equity strategies.

The answer

Internal v external sources

Internal source. Retained profits - profits the business has earned in past years and not paid out as dividends. Internal finance has no interest cost, no dilution and no external approval needed, but is limited by past profitability.

External source. Any source outside the business - debt or equity. External finance unlocks larger investments than retained profit alone but introduces interest, dilution or both.

A growing business typically uses a mix. Atlassian, in its early years, used retained profits sparingly and instead drew on equity (venture capital, then the 2015 IPO on the NASDAQ) to fund accelerated growth. A mature business like Woolworths funds most of its capex from retained profit, supplemented by debt for large projects.

Debt finance

Debt is money borrowed and repaid with interest. The syllabus separates short-term and long-term debt.

Short-term debt

Repaid within 12 months.

• Bank overdraft. A pre-agreed facility to overdraw the operating bank account up to a limit. Flexible and cheap to set up; interest only on amount drawn.
• Commercial bills. Negotiable debt instruments (typically $100,000+) sold at a discount and repaid at face value at maturity (90-180 days).
• Trade credit. Suppliers extend credit terms (e.g. pay within 30 days). Often "free" but not zero - early-payment discounts foregone are a real cost.
• Factoring. Selling accounts receivable to a factor for immediate cash. Speed at a price.

Long-term debt

Repaid over more than 12 months.

• Mortgage. Loan secured against property. The interest rate is lower because of the security; if the business defaults, the lender can sell the asset.
• Debentures. Long-term loans (typically 5-15 years) issued to the public or institutional investors, secured against specific assets or a floating charge over the business.
• Unsecured notes. Long-term loans without specific security. Higher interest because no asset backing.
• Leasing. Renting a long-life asset (vehicle, equipment, building) rather than buying. Operating leases are simple rent; finance leases transfer most ownership risks and rewards. Useful when the business wants the asset's use without the capital tied up in ownership.

Equity finance

Equity is selling ownership in the business. For a private company, equity is shares held by founders, family or private investors. For a listed public company, equity is shares traded on the ASX.

The syllabus names four equity-raising mechanisms for listed companies.

• New issues (Initial Public Offering, IPO). The first sale of shares to the public via the ASX. Atlassian raised over US$460 million in its 2015 IPO.
• Rights issues. Existing shareholders are given the right to buy additional shares at a discount, in proportion to their existing holding. Preserves existing shareholders' proportional ownership.
• Placements. Shares issued directly to a small number of institutional investors. Fast to execute (no shareholder vote needed for placements under 15 percent of capital under ASX listing rules) but dilutes retail shareholders.
• Private equity. Institutional capital invested into private (not listed) companies, often with a 5-10 year hold and an exit plan (IPO or trade sale). Common in Australian mid-market business growth (KKR's investment in Findex, BGH Capital's investments in Healius and Greencross).

Financial institutions

The syllabus lists six categories. All are relevant to Australian businesses but their roles differ.

• Banks (Big Four: CBA, Westpac, NAB, ANZ; plus Macquarie, ING, regional banks). The dominant source of debt finance for most businesses.
• Investment banks (Macquarie, plus global names like Goldman Sachs and JPMorgan in Australia). Underwriters of IPOs, debt issues, and M&A advice.
• Finance companies (Latitude, Pepper). Non-bank lenders specialising in consumer finance and SME lending.
• Superannuation funds ($3.9 trillion in Australian super assets, the world's fourth-largest pension pool). Major investors in ASX-listed equity, infrastructure debt, and direct private market investments.
• Life insurance companies (TAL, AIA, MLC). Long-term capital investors via their general accounts.
• Unit trusts and managed funds. Pooled investment vehicles that invest in shares, fixed interest and property.
• The Australian Securities Exchange (ASX). The market where listed equity is traded. Provides primary market access (new issues) and secondary market liquidity.

Government influence

Government shapes the financing environment through:

• ASIC - the Australian Securities and Investments Commission, the corporate, markets and consumer credit regulator. ASIC enforces the Corporations Act, including disclosure obligations for listed companies and licensing of financial services providers.
• APRA - the Australian Prudential Regulation Authority, regulating banks, insurers and super funds. APRA's bank capital rules shape lending capacity for business.
• Taxation. The 30 percent corporate tax rate (25 percent for base-rate entities under $50m turnover), the dividend imputation system, R&D tax incentives, instant asset write-offs. Tax policy materially shapes the cost of capital.
• Grants and subsidies. Industry-specific grants (e.g. the Critical Minerals Facility, the Future Made in Australia Innovation Fund).
• Monetary policy via the RBA cash rate. Cash-rate moves flow through to business borrowing costs within weeks.

Global market influence

For Australian businesses operating internationally, global financing matters.

• Global capital markets. Large Australian businesses (BHP, Macquarie, Westpac) issue debt internationally - the US 144A bond market, the European MTN market, the Asian USD bond market.
• Exchange rates. A weaker AUD raises the AUD cost of USD-denominated debt servicing. Businesses hedge this risk (BHP, Qantas) using forwards, options or swaps.
• Global interest rates. US Federal Reserve and ECB rate moves flow through to global cost of capital and feed into Australian financing costs.
• Foreign direct investment. Foreign investors can buy Australian businesses, subject to Foreign Investment Review Board approval for thresholds and sensitive sectors.