P4 – Unit 2Assignment 2.3
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Suitable Sources of FinanceMrs Hunter
www.njhunter.co.ukNO IDEAI NEED HELP
NEVER HEARD OF IT
OKI CAN DO THIS WITH SUPPORT
SOME GUIDANCE NEEDEDNEARLY AT MY TARGET
GOT IT!VERY CONFIDENT
WILL HIT MY TARGET GRADE
EXCEED TARGET
Success CriteriaP4 (All) Define all suitable sources of finance looking at whether these
are internal or external. Recommendations +
Quality of written and verbal communication and SPAG
LEARNING OBJECTIVESExplore the suitable sources of finance for Billy the painter and decorator
• Internal Sources of Finance
• Funds obtained from sources within the business
• External Sources of Finance
• Funds obtained from sources outside the business
Sources Of Finance
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Short Term• Payable within a year
Medium Term• 1-5 years
Long Term• 5 years +
Time Periods for Finance
10 years
1 month
Internal Sources of Finance
(Finance generated within the business)
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• To being trading. (start-up costs) • In order to operate (running costs)
• Cash flow problems• Expansion / Growth• Funding extra working capital
The need for finance
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• Applies to most small businesses i.e. sole traders and partnerships
• Includes savings, redundancy pay ect.
• Owners are at risk of loosing their money.
Owners’ Capital
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• Reinvesting profit avoids paying interest, with monthly re-payments.
• NOT popular with shareholders, who receive a lower dividend as a result.
• The business needs to be making a healthy profit in order to do this... and this still may not be enough!
Retained Profit
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• A business could sell assets such as land, property or equipment.
• It makes sense IF they are no longer in use and not required.
• Selling assets usually occurs when all other means have failed!
Selling Assets
www.njhunter.co.ukRover MG Sells All Its Assets
• Administrators say they will push on with plans to sell MG Rover's assets, after the firm collapsed leaving debts of £1.4bn
• Why did this happen?
• Could this have been prevented?
• What other attempts do you think Rover could have made in order to recover?
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• Reduce the length of time an outstanding bill can be paid.
• Putting pressure on clients to pay early.
• Can damage relationships with customers.
Tighter Trade Credit
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• A large amount of money maybe tired up in stock.• Stock and materials are usually paid for well
before they are turned into products.
• In danger of being unable to meet a sudden influx in demand.
• Loss of orders• Bad Reputation
Reduce Stock Levels
www.njhunter.co.uk Summary• Owners Capital – Savings, Redundancy pay ect
• Retained Profit – Reinvesting or holding back profit to put back into the business
• Selling Assets – Selling equipment or property to raise funds
• Tighter Trade Credit – Reducing length of time customers have to settle the bill
• Reducing Stock Levels – Buying less stock
Homework - Questions1. What is meant by ‘Internal Source of
Finance?’ (1)
2. Why might a) new business need finance? (3)b) an existing business need finance? (3)
3. Explain how retained profit can be used to finance a business? (5)
Small Businesses
Medium sized businesses
Large corporations
Choice of finance
PLC
Sole Trader
External Sources of Finance
(Finance obtained from sources outside the business)
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• Associated with a sole trader or partnership.• Low cost finance in terms of interest• Little or no security required.
• This type of finance is usually quite small.
Family and Friends
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Money is provided by the lender, and has to be paid back with interest. (%)
Fixed Terms Quick way of receiving the amount you need.Repayable long or short term ( 3–5 years)Banks will perform a risk assessment, and may require
security.A change in interest rates may make payments
unaffordable.If regular payments are not made, the business will be
forced to close.
Loans
Over Drafts
• Are agreed with the bank• Less expensive and more flexible than a loan.
• SHORT TERM• Charges occur according to the amount
‘overdrawn’• Lenders can remove overdraft facility at
anytime.
Trade Credit
• Use the maximum length of time offered.
• This will not apply if you are a new or un-established untrustworthy business.
• The money needs to be repaid in such a small period of time (30 – 90days)
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‘A service offered by a financial organisation to recover outstanding invoices’
• Removed burden of credit control• Improves cash flow immediately
• Selling below face value. Receiving 80% or 90% of the recovered debt.
• Could damage relationships with customers
Factoring
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• Written acknowledgement of debt• A type of fixed period loan• Unsecured (without collateral)
• Secured only by the issuer
Debentures
Example 1….• A debenture reserves
your seat at the Twickenham Stadium Stadium for 10 years. (£6,000 each)
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• Capital mainly provided by banks or wealthy investors
• Expect a return in interest and part ownership of the business
• Considered a high risk investment• Popular with new companies (or ventures)
Venture Capital
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• Angels typically invest their own funds, unlike venture capitalists.
• Expect a wealthy return and part ownership of the business
• Considered a high risk investment• Popular with new companies (or ventures)
• http://www.teachmebusiness.co.uk/Bilton%20School/video%20clips/raising%20finance.wmv
Business Angels
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• Common for both start-up capital and additional capital at later stages of a business.
• Firms raise capital by quite simply selling a share of the business
• Issuing shares can be quite expensive, so only appropriate for raising large sums of capital.
• PLC’s sell share on open stock market (i.e London stock exchange)• Ltd’s are restricted in the way they sell their shares.
Share Issue
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• Only a business is designated areas of the UK will benefit from government grants.
• There are many different initiatives... Such as paying % of staff hiring costs, being a loan guarantor, providing money (grant) for business start-up costs.
• Areas of poor growth• High Unemployment rates
Government Grants /Loans
www.njhunter.co.ukFactors affecting the choiceThe amount
required
The length of time for which the money
is needed
The risk involved
The cost of the money
Loss of control
Advice available
Choosing a funding method
Short Term Vs Long Term
Repayable within 1 year
Repayable between 1 – 5 years
• Loans• Trade Credit• Bank Overdrafts• Debt Factoring• Selling Assets• Owners Capital• Retained Profit• Reducing Stock Levels
• Loans• Hire purchase• Leasing• Share Issues• Mortgages• Debentures• Business Angels• Venture Capital• Family and Friends (?)
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• 1. Outline the disadvantages of using internal sources of finance to fund major investment programs.
• 2. Why might a business try to avoid borrowing large sums of money over long periods of time.
• 3. What Criteria might a small business have to meet to attract financial support from the government?
Questions