Sources of Finance for Partnerships

Written by marquis codjia
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Sources of Finance for Partnerships
Partnerships need funding to operate and grow. (money money money image by Arman Zhenikeyev from Fotolia.com)

Partnerships need financing to fund short- and long-run initiatives, meet operational requirements, establish working capital guidelines and fund expansion strategies. They also need funding for merger and acquisition needs. Partnerships vary in size, legal status and business objectives. They may be multi-billion-dollar firms--such as law or accounting organisations--or small entities engaged in real-estate broking activities.

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Bank Borrowing

Partnerships may receive short- and long-term financing from institutions such as banks and hedge funds. They could apply for unsecured loans, revolving lines of credit or overdraft agreements. Unsecured loans don't require collateral assets from borrowers. Corporate finance specialists help partnerships evaluate adequate capital structure models and recommend financing sources. Partnerships pay lenders monthly or quarterly amounts in accordance with borrowing agreements. For instance, Partnership ABC might receive £0.6 million in loans from Bank CBA with interest of £6,500 due every month for 10 years.

Partnership Equity

Partnerships may sell equity shares to investors--such as banks, asset managers, venture capitalists and insurance companies. These shares give investors stakes in partnerships, and investors acquire voting rights. Buyers of partnership equities receive periodic income distributions--usually every year. For example, investors who buy equity shares from Partnership XYZ might vote on management decisions and income distribution matters.

Hybrid Financing

Partnerships may receive funding by selling debt-equity securities. Such securities are referred to as hybrid or quasi-debt. Entities engaged in quasi-debt financing make periodic debt payments to lenders. They also distribute portions of earnings at year-end in accordance to quasi-debt agreements. For instance, investors who buy £0.6 million quasi-debt securities will receive income distributions and loan instalments for the time period indicated in the quasi-debt contract.

Partnership Equity

Partnerships may use accumulated earnings--or partnership equity--to fund operating needs or short- and long-term projects. Corporate finance specialists and investment bankers help partnerships evaluate and propose adequate capital structure levels. These experts study partnerships' financial data, key operating metrics and investment objectives to assess appropriate financing alternatives. For example, Partnership XYZ's internal cost of funding is 10 per cent lower than the market lending rate of 12 per cent; the firm might decide to use its own funds for investment purposes because of lower financing costs.

Government Subsidies

Governments provide subsidies or tax breaks for partnerships who meet applicable program guidelines. These guidelines might relate to investments in designated economic zones or sectors. For instance, a U.S.-based partnership might receive a federal environment tax benefit for reducing operating pollution levels or investing in environmentally friendly energy sources.

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