Question

As the CFO of GES Corporation, which is a fashion design firm, you need to find $5 million to expand the company's production. Research and discuss how the process of raising the $5 million would be different with the assistance of a financial institution versus raising the money directly from the financial markets?

Answer 1

The fundraising process involves a number of stages, during the course of which a company appoints advisors, prepares a Business Plan, defines their funding strategy, presents to potential investors, undergoes a due diligence investigation and finalises the detailed legal agreements before finally receiving the investment funds.

In both the options (i.e raising money through financial institutions and raising directly from the market) the process is going to be the same. The only difference is that while raising the fund directly from the market the entire process has to be carried out by the firm and this could undermine the compny's core business.

Because businesses have a small core management team, a team that should be fully focused on delivering the objectives and goals of the company. The common error made is that during the funding process, management’s focus is distracted away from the development and operation of the company’s core business. On appointing Financial Intermediary, the company can ensure that this distraction is minimised and the necessary skills to assist the fund raising process will be sourced.

The main advantage of institutional finances are as follows:

• By seeking the advice of a financial institution before loaning an amount you are making a lot of decisions more convenient for yourself to make simply because their knowledge base on the area of loaning and finances is pretty much perfect.
• The investment banking institution will allow the GES Corporation CFO to raise more money at a lower cost per dollar raised.Because Investment banking institutions are able to use the expertise developed through the acquisition of funds for many firms to reduce the effort and cost of acquiring funds for any single business.
• In adition to providing funds, many of these institutions provide financial, managerial and technical advice and consultancy to business firm.