SS2 Commerce Lesson Note on Sources of Capital

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TOPIC: LIMITED COMPANIES

Content: 1. Sources of capital

2. Advantages and disadvantages of limited Liability Companies

SUB-TOPIC 1: SOURCES OF CAPITAL

The following are sources of capital open to limited liability companies.

1. Loans and Overdraft: These can be obtained from the bank by the company to finance their operations
2. Retained earnings or plough back profit – the profit made by the company can be set aside for re-investment.
3. Credit purchase – Raw material can be purchased by the company on credit.
4. Hire – purchase: companies can be granted hire purchase facility by the seller to acquire some of their assets.
5. Equipment leasing – companies can lease some of their equipment from a given leaser and make payment through rental payment through rental payment.
6. Sales of shares – public limited liability companies can raise capital by issuing shares to the public through the stock exchange
7. Sale of debenture: – these are long – term loans obtained form the general public at a fixed interest
8. Bill of Exchange – this is a document duly signed by debtors bank to the creditors and the creditor cashes the money with some documents.

Shares

A share can be defined as the unit portion of the company’s capital owned by a shareholder. It is a unit which a shareholder has in a company.

Classes of shares

There are basically two types of shares namely

• Preference shares and
• Ordinary shares

Preference shares

These are shares whose dividends are paid first and have a fixed rate of dividend. They include cumulative, participating redeemable, non-cumulative, non-participating and convertible preference shares.

Features of Preference shares

1. They have no voting right
2. They have a fixed rate of interest
3. Holders receive dividend before others
4. They are entitled to return of capital first at winding-up

Preference shares are of many types which include

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