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