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ACCA Applied Skills · Financial Management · Finance for small- and medium-sized entities (SMEs)

A small family-owned manufacturing company wants to raise new long-term finance but its directors are reluctant to dilute their control. Which of the following is the most appropriate source for the company to consider?

A secured bank term loan is most appropriate because it provides long-term funds without issuing new shares, so the directors retain control. Public offers and placings dilute ownership and are costly and impractical for a small unlisted family company.

  1. AA rights issue to existing shareholders, since this is the main route used by unlisted SMEs
  2. BA bank term loan secured on its propertyCorrect
  3. CA public offer of shares on the main market of a stock exchange
  4. DA placing of new shares with institutional investors

Explanation

A secured bank term loan raises long-term finance without issuing shares, so the directors keep control. A public offer and a placing would bring in new shareholders and dilute control, and a listing is usually unrealistic for a small firm because of its cost and size. A rights issue to the existing family is not the key route and is limited by the owners' own funds.

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