Some stakeholders provide finance for the business.
A stakeholder is any individual person, any group of people, or any organization, who has a direct interest in the business. The business affects their activities, actions and performance.
Businesses have two types of stakeholders – including internal stakeholders and external stakeholders. Each stakeholder group has their own objectives which they will want to achieve. Stakeholders achieve their objectives through their relationship with the business
While all stakeholders also have certain rights and responsibilities, some of them have a very special relationship with the business. It is because they provide finance to the firm to keep it operating and expanding. As some people tend to say ‘No money. No honey!’.
Let’s take look at the four main stakeholders who provide companies with finance. And let’s try to figure out what characteristics make the relationship special.
1. Shareholders (Owners)
Shareholders are the owners of a limited company. They own shares in the business. They invest in companies to earn money.
Preferred stocks. Preferred stocks are units of ownership in limited liability companies, either a Private Limited Company (Ltd.) or a Public Limited Company (plc). In general, preferred stocks are given to investors in exchange for cash, while common stocks are directly issued to founders and early employees of the business. Rights of shareholders include having a part ownership of the company in proportion to the number of shares owned.
How shareholders earn money? First, they receive dividends, an annual return on investment in shares, as recommended by The Board of Directors (BOD). And second, they receive capital growth through an increase in share price when the business is doing well – growing and being profitable. Also, they may be entitled to receive interest on a loan in case crowdfunding was used and was loan based.
If the business goes bankrupt, preferred shareholders will receive a share of the capital after all debts have been paid. However, shareholders cannot claim back their money back from the company capital invested except when the firm ceases trading. But, they can try to influence company policy through pressure during The Annual General Meeting (AGM).
2. Banks & Other lenders
Banks, and other financial institutions such as microfinance providers, lend money to businesses in order to earn interest on a loan. Upon the expiration of the loan, the borrowed capital should be returned by the company. As access to finance (capital) is a necessity for the success of many business projects, a big portion of each company’s capital often comes from long-term bank loans.
Overdraft. An overdraft is a deficit in the company’s bank account caused by drawing more money than the bank account holds. The business is able to be overdrawn in bank account by a certain amount. So, the bank allows the business transaction even though there is not enough money in an account to cover that transaction. But, before allowing any overdrafts, the bank will check on business viability.
The responsibility of the business is of course to pay interest charged on the overdrawn money, and to repay the overdraft as soon as possible.
Bank loans. Loans are amounts of money that the business borrows from banks and other financial institutions for large and long-term business projects, e.g. buying land and buildings, investing in new technology, expanding the business, etc. The bank wants to make a profit from the loan which is interest that the business pays every month. Specific terms for interest repayments are laid down in the loan agreement (the loan contract). The bank will also need to receive the repayment of capital in full at the end of the loan term. Another objective for the bank is to establish a long-term relationship of mutual benefit with the business for any future transactions.
Microfinance. Poor and low-income people, who do not have access to regular banking services but who want to become entrepreneurs, can use microfinance. Microfinance providers are financial institutions that provide small amounts of money to people, mainly in developing and relatively low-income countries, who want to start their own businesses. The entrepreneurs will receive small amounts of capital that needs to be repaid with interest, just as any regular bank loan.
3. Creditors (Suppliers)
Suppliers provide businesses with inventory required for producing products – stocks of raw materials, component parts and finished goods. Suppliers supply goods and provide services to allow the business to continuously produce its products without any unplanned stoppage time. So, the business can offer its products to customers on time.
Trade credit. The objective of suppliers is to deliver raw materials to the business and receive timely payments. However, businesses do not always pay their bills as soon as they receive the supplies. Therefore, the suppliers tend to provide trade credit to encourage the business to purchase stock anyway.
Businesses establish a relationship with suppliers that is built on trust, so that trade credit can be offered with confidence that the bill will be paid. The trade credit is usually offered for around 30-90 days, sometimes longer for as long as 180 days. Suppliers want to receive payment from the firm as agreed, hence they should provide regular statements of amount owing and terms of repayment to keep the business informed. You know, people tend to forget (…).
If the business goes bankrupt, creditors have the right to attend creditors’ meetings during liquidation proceedings. They will also be paid any amounts due before common shareholders in the event of the business being shut down.
4. Employees
In general, directors and managers are responsible for overall performance of the business.
Directors are senior executives, who are the members of The Board of Directors (BOD). They have been chosen by the company’s shareholders (owners) to set objectives on behalf of them.
Managers are at the lower level than directors. Managers oversee all daily operations of the business and are responsible for implementing the objectives set by the directors.
Lower-level employees are the staff who produce goods and provide services for sale, execute orders from the managers to achieve business objectives, and communicate with the customers to keep them satisfied.
Employee crowdfunding. Employees may participate in crowdfunding organized by the business to raise a small amount of investment from a lot of people who work at the business. When summed up, many small amounts will equal a much larger sum.
Rights of employees include having part ownership of the company in return for investment funds. Also, they are to receive interest on crowdfunded loans in case crowdfunding was loan based.
Common stocks. Common stocks are generally directly issued to founders and early employees of a business. While issuing common stocks to The Chief Executive Officer (CEO) and directors gives important employees share ownership in the business serving as a financial motivator, common stock option grants can serve as a source of finance.
Common stock options give employees a right to buy additional shares at a set price (usually at the fair value rather than current market price). If an employee exercises his right to the option, the company will issue the corresponding number of shares of common stock the employee in exchange for cash.
However, employees owning common stocks have lower priority than preferred stockholders and creditors when it comes to getting their money back when the company liquidates in case of bankruptcy. But, they can vote on important issues that can help move the business in a certain direction, e.g. choosing The CEO, election of directors, or global expansion plans.
Investopedia.com nicely explained the differences between common stocks and preferred stocks. Check this out! It is a great resource for business knowledge. Check 'Preferred vs. Common Stock: What's the Difference?'.
