Relationship between External Debt Finance and the Business Lifecycle of the Company - Term Paper Example

Report on a Case Study of a Selected Small Business Table of Contents Introduction 3 Analysing Relationship between External Debt Finance and the Business Lifecycle of the Company 4 Examining the Usage of External Equity Finance and Owners-Managers Views 6 Describing Other Approaches that the Company used to Seek External Finance Support 10 Government Support 10 Loan Guarantee Scheme or Loan Commitment 11 Collateral and Guarantees 12 Analysing Financial Gap and its Impact on Business Development Objectives of the Company 12 Comparison of Findings 13 Conclusion 14 References 16 Introduction Founded in the year 1997, Data Integration (DI) has been recently observed to achieve a greater attention in terms of providing a number of IT solutions including network security, data or application optimisation along with advanced mobility and open access network related services. The company is renowned for its exceptional deliverance of high performance based hosting solutions with high availability and secured networking service to more 300 well-known institutions ranging from finance, insurance, education and different public sectors (Data Integration, 2014). In the year 2011, Xchanging Technology Services Plc, a renowned global technology and procurement service provider acquired DI. In relation to the current business practice, DI is specialised on delivering managed networking and security services along with greater mobility solutions to major clients. The company performs range of IT related businesses in a consultative approach with its dedicated consultancy team of 60 staff member, wherein 46 of them are with full time employment (Xchanging plc, 2014). In the context of business management, DI is highly determined to deliver quality based and excellent IT solutions and mobility services to each clients located in the UK. In this regard, the professionals in the company are committed to acquire cutting edge networking and mobility solution services that provide adequate support to the clients to meet their business needs (Xchanging plc, 2014). Therefore, by emphasising the current business practices of the company, the essay critically explores and evaluates different financial support paths of DI in its different stages of lifecycle for delivering IT solutions to different business institutions. In this regard, the discussion also focuses on the preferential financial sources of the company required in its different business operational fields. In addition, the discussion also critically evaluates the public policies crafted to address the needs of SMEs and entrepreneurs and discuss their application in the context of DI. Analysing Relationship between External Debt Finance and the Business Lifecycle of the Company Debt finance is a process of possessing financial support from a secured or unsecured source with a commitment to return principle amount within a particular period of time. In most cases, debt finance is agreed upon a rate of interests, which is mutually agreed by both the parties. Although it ensures major support to borrowers to attain a large level of finance, debt finance tends to bear a number of negative connotations for the start-up stage of the companies to repayment aspect within the stipulated timeframe (Deakins & et. al., 2008). The relationship of debt finance within business cycle can be attributed to develop a link between the different operational levels with the capital structure of a company. In the context of small business industry, firms are often identified to be involved in debt finance due to their lower capability in the capital structure for financing large amount of monetary resources in different operational activities. Moreover, SMEs are also observed to be involved in various types of secured and unsecured type of debt finance at the start-up of a business with the aim of making investment in different operational activities (Balling & et. al., 2009). In the context of DI, the company comprises a small level of its capital structure with low amount of investment along with expenses in delivering IT solutions to different business institutions across UK. The capital structure of the company has been observed to encompass a large number of its operational activities ranging from its different business segments including network and security services, along with high performance based hosting solutions to different educational, finance and public sectors among others (Park & Pincus, 2000). In order to avoid risks associated with the increasing level of debt finance, the financial strategy of DI is highly focused on considering adequate measures that can enable the company to gain a significant return from the clients associated with education or public sectors. In this context, the business strategy through emphasising continuous process of innovation in producing IT solutions for different types of organisations can enable DI to stimulate adequate financial return and mitigate issues associated with increasing debt finance rate (Park & Pincus, 2000). Moreover, the strategy of reducing costs in operations are highly focused on stimulating effective cost control measure also in order to enable DI to increase its annual financial return and address negative influence of debt finance. In the present business scenario, the company has been observed to include effective strategic measures regarding cost management initiates. In this context, the company is identified to emphasise cost reducing strategy by reducing recruitment costs along with advertising and promotional cost also in order to provide a better financial support for the operations of DI (Department for Business Innovation and Skills, 2012). The financial performance of DI has been observed to achieve a gradual increase in terms of revenue and minimise its annual debt finance. In this regard, the company adequately focused on reducing operational costs associated with its service providing segments have been considered to facilitate it to mitigate potential issues that can emerge from debt finance. Additionally, it can be advocated that the financial strategy of DI should also incorporate different other business risks, which negatively affect the company to address its debt finance issue. In this context, adequate focus on has been offered in the area of sales risk, which have a direct impact on per unit price of products and services delivered by DI (Berger & Udell, 1998). The process will help the company to achieve desired financial goals of its range of IT solution services and accordingly, mitigate the possible threats emerging due to debt finance. In addition, the financial strategy of DI should also considerably focus on input-cost risk, which can convey volatility regarding the inputs associated with its products and/or services. The process would enable the company to build flexible pricing strategy by changing costs of its wide range of products and/or services (Bhaird, 2010). Examining the Usage of External Equity Finance and Owners-Managers Views Equity finance fundamentally defines the sale of a particular ownership interest in order to elevate inward funds for different business purposes. The financing behaviour of equity finance depicts a wide span of scope and opportunity for entrepreneurs to raise funds from different external sources including public offering, family or friend. Equity finance does not only involve the sale of equities and the financing behaviour but also entails other equity instruments such as convertible stocks, common shares and preferred stocks of companies (Berger & Udell, 1998). In the context of gaining successful financial growth from its start-up stage, a company is highly required to possess several rounds of external equity financing. This is owing to the fact that the start-up stage of companies often attracts a large of number of external financing sources across various stages of evolution within a particular business industry (Berger & Udell, 1998). In the context of financial performance of DI, the company has been observed to gain gradual increase in finance through effective financial decisions and strategies. According to the evolution stages throughout the past seventeen years, the company had faced a number of risks as well as challenges to achieve its financial goals efficiently by performing business operations for the educational and other different business institutions. Additionally, the strategy of establishing long-term financial goals and steady practice of managing costs associated with providing IT solutions to a large number of private and publicly held organisations has enabled DI to gain a number of valuable investors from different internal and external sources. The external equity financing strategies of the company often includes a process of attracting potential investors by its long-term business goals and strong collaborative approach with the renowned privately and publicly held institutions. In this regard, the strategy of defragmenting business operations into a wide range of valuable aspects encompassing various IT solutions and services to different organisations have assisted the company in performing business operations effectively (Berger & Udell, 1998). According to the long-term business goals and visionary approach of DI, the company involves a strong business tactic of building appropriate IT solutions and services in accordance with the needs and expectations of the clients. Moreover, establishing strong relationship with IT vendors and performing an independent business approach provides a major support to DI in terms of gaining adequate return of its investment (Xchanging plc, 2014.). With reference to the views of owner-managers of DI, the values and visionary concept of providing cutting edge IT solutions in accordance with the needs and of the clients have been widely accepted to grasp the attention of potential investors. At the initial stage of the business operations, the board members or the executive directors of the company have been observed to focus on refurbishing its exceptional deliverance of IT solutions towards the excellence of its wide range of valuable clients in different business sectors. With regard to financing business segments, the company has also been further witnessed to achieve stability by collaborating strong alliance with the leading publicly held agencies and institutions in the UK. The costs management and effective controlling measures of investment as well as expenditure structure have assisted it to gain long-term financial goals (Xchanging, 2014). Moreover, formulation of business strategies and ensuring adequate compliance with the guiding principles of the company is considered as few of the major roles and responsibilities of the owner-managers to attract the potential investors. The business strategies of the company involve a prevalent culture of innovating IT solutions and providing adequate support to the clients by streamlining management, control and organising different practices (Iacoviello & Pavan, 2013). In addition, ensuring appropriate alignment of the business values and practices with the strategic measures have also been witnessed to render major support to DI in terms of achieving greater interest of the potential financers across different locations in the UK. According to the current emerging evolution of business performance, the process of streamlining business practices and producing cutting edge IT solutions have further improved the number of valuable stakeholders in DI in the form of the company’s external financers (New South Wales Treasury, 2013). The continuous increase in stakeholders in the form of investors has also been observed to provide a major support for the company to provide financial support to its different valuable service segments. The customers comprising public sector and organisations that include education, finance and insurance can also be regarded as one of the major stakeholders for the company to reinforce its investment decisions. Furthermore, DI has also been identified to gain the interest of a wide range of external investors and suppliers, which have aided the company to strengthen its financial performance in its each segment of business (Kagwathi & et. al, 2014). Describing Other Approaches that the Company used to Seek External Finance Support According to the recent business environment of SMEs, seeking external financing support has been widely observed by the companies through implementing a large number of strategic measures and practices. Moreover, organisations are often observed to establish strong values and corporate culture in order to gain the interests of the external investors. In relation to the emergence of modernised business environment especially in the IT industry, organisations have also been witnessed to grasp the attention of the financers through streamlining their current financing and accounting techniques to the potential groups of stakeholders. The strategy significantly helps SMEs to ensure that the stakeholders are regularly informed about their investment in the form of financial report by administering their investment amount within different operational segments (Bhattacharya, 2009). In the context of DI, there is number of business approaches critically observed that enable the company to gain valuable financial support. In this regard, the strategy formulation along with decision making skills have been identified to play a major role for the company in terms of acquiring financial support from different external investors. In addition, there are number of other aspects that can be recognised to empower the capability of DI to seek financial support from different external resources (Xchanging, 2014). Few of the major business approaches leading to acquire financial support have been briefly discussed hereunder. Government Support The strong collaboration with a few numbers of publicly held institutions and their different business service segments can be identified as one of the key approaches of DI to acquire a large number of potential investors. Performing business performance underneath the strategic direction of Xchanging Technology Services Plc has also been regarded as one of the major advantage for DI to gain a large amount of financial support from different external sources (Xchanging, 2014). According to the current business practices, DI ensures a long-term commitment with its major group of clients in terms of rendering cutting edge IT solutions. The practice in this regard, enables the company to acquire a large portion of financial support and reinforce its investment decision in different IT segments. Thus, the government support is one of the major factors for DI to acquire interests of the potential group of external investors (Berger & Udell, 1998). Loan Guarantee Scheme or Loan Commitment In relation to the current financial policies, DI ensures strong commitment towards meeting its line of credits, which facilitates it to acquire valuable investors. The loan commitment of the company tends to provide major protection against the possible credit crunches derived from the general market economy. The loan guarantee scheme in DI also helps the company to resolve adverse selection of potential moral hazards that can negatively affect the company in order to strengthen its financial performance. The process of loan commitment in DI also grasps the attention of the valuable investors, as it tends to provide a number of contract terms and commitment regarding usage fees, interest rates along with upfront fees regarding the financial support for the investors. Therefore, the loan guarantee scheme of DI can be also considered as a major financial approach of the company to acquire valuable investors (Belo & et. al., 2014; Berger & Udell, 1998). Collateral and Guarantees Collateral and guarantees are few of the major financial approaches used by DI that allow the company to raise required fund for its diverse operational activities. The approach enables DI to acquire substantial credit from financial institutions through valid security interests of its specific assets. The process in this regard facilitates DI to bear feasible costs in terms of producing cutting edge IT solution for different organisations that include education, finance, public sector and insurance (Covas & Hann, 2011). Analysing Financial Gap and its Impact on Business Development Objectives of the Company With reference to the factors associated with financial liabilities, a major finance gap can be witnessed, which affects DI to a certain extent to stimulate its business development. Although substantial amount of funds are raised through external equity, but it is apparent that the company also relies considerably upon depth financing. Correspondingly, there is a certain financial gap as far as its fund raising activities are concern (Berger & Udell, 1998). At the initial stage, DI had been identified to increase its debt finance for developing its business operations. However, the increased reliant on debt financing may impose major risk in terms of DI’s ability to meet its debt obligations. Consequently, the process may have negatively impact the company to increase investment on its product development processes. On the other hand, higher focus on external equity finance by DI can also sabotage its ownership structure. This is owing to the fact that adequate increase in equity capital might lower the controlling capability of DI, as the process of selling large equity might negatively influence the company (Berger & Udell, 1998). Accordingly, the imbalance in its fund raising activities i.e. external debt and equity finance to meet its working capital requirement can be viewed to influence the growth opportunity of DI. Subsequently, in order to ensure smooth functioning of the business operations, it highly requires DI to ensure periodic payment to the lenders with pre-specified interest rate. The process can help the company to mitigate risks associated with rising debt finance. On the other hand, the company should also need to focus on balancing in terms of selling equity finance to the investors by consolidating the value and importance of its convertible stocks, common shares and preferred stocks (Berger & Udell, 1998). Comparison of Findings In relation to the financial performance of DI, it has been critically identified that the funding activities of the company relies primarily upon its debt and equity finance. However, both funding approaches may have both positive and negative impact on the company to stimulate its business operations. According to Kagwathi & et. al. (2014), the major comparison associated with both external debt and equity finance can be attributed in terms of their advantages and disadvantages. Additionally, financial structure is also identified to play an important role in ensuring the investment operations are performed in a systematic manner (Kagwathi & et. al, 2014). The process of funding through external debt finance allows DI to develop its infrastructure for producing IT solution services and it can be of major support for the company to pursue continuous growth. However, increasing instability in the interest rates can severely affect DI in terms of repaying the debt amount. The failure of repayment within the pre-specified interest rates and postulated period may lead the company to lose its capital assets. In this regard, Berger & Udell (1998) noted that external debt finance plays an imperative part in accumulating funds to conduct business operations effectively. Additionally, external debt finance is also required to be repaid in a timely manner in order build confidence amid investors. Moreover, mix is internal and external debt structure should be managed with an efficient capital structure (Berger & Udell, 1998). In the context of external equity, the funding option may increase opportunities for DI to stimulate business functions. The funding process also enables the company to avoid any type of repayments risks and facilitates to share liabilities and risks with the new investors. However, the funding process of external equity may result in reducing its capability of making effective decisions regarding business operations. Nevertheless, it can influence the company to maintain a strong ownership structure (Berger & Udell, 1998). Subsequently, it can be comprehended that different funding approaches of the company are associated with both positive as well as negative consequences. The company with the assistance of an appropriate capital structure based on its overall business processes would ensure a sustainable performance in future. Additionally, appropriate capiatl structure would also aid in building trust and confidence amid investors. Thus, the company with the assistance of its capital structure is able to obtain both internal and external investors effectively. Conclusion With regard to an in-depth understanding about the use of current funding approaches, it is apparent that both external debt and equity finance have played a major role for DI to stimulate its business operations. However, due to a number of risk factors, the company should highly focus on addressing negative issues associated with the funding approaches. The approach of ensuring adequate return with committed level of dividend in response to the investment portfolio of the investors can be considered as one of the major decision of DI. According to the past financial records of the company, it has been observed that the company has been able to ensure substantial rate of dividend to its major groups of investors. Thus, there is a greater possibility for DI to acquire attention of the potential investors. The financial liabilities of the company also occupy major influential factors for the investors prior to their investment decisions. In this regard, the company possessing adequate liquid assets to meet its current liabilities may also enable it to acquire potential investors. References Balling, M. & et. al., 2009. Financing SMEs in Europe. SUERF – The European Money and Finance Forum [Online] Available at: http://www.suerf.org/download/studies/study20093.pdf [Accessed July 24, 2013]. Berger, A. N. & Udell, G. F., 1998. The Economics of Small Business Finance: The Roles of Private Equity and Debt Markets in the Financial Growth Cycle. Introduction. 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