Presentation on theme: "Suitable Sources of Finance Mrs Hunter"— Presentation transcript:
1 Suitable Sources of Finance Mrs Hunter P4 – Unit 2 Assignment 2.3Suitable Sources of FinanceMrs Hunter
2 NO IDEAI NEED HELPNEVER HEARD OF ITOKI CAN DO THIS WITH SUPPORTSOME GUIDANCE NEEDEDNEARLY AT MY TARGETGOT IT!VERY CONFIDENT WILL HIT MY TARGET GRADEEXCEED TARGETLEARNING OBJECTIVESExplore the suitable sources of finance for Billy the painter and decoratorSuccess 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
3 Sources Of Finance Internal Sources of Finance Funds obtained from sources within the businessExternal Sources of FinanceFunds obtained from sources outside the business
5 Time Periods for Finance 1 monthShort TermPayable within a yearMedium Term1-5 yearsLong Term5 years +10 years
6 Internal Sources of Finance (Finance generated within the business)
7 The need for finance To being trading. (start-up costs) In order to operate (running costs)Cash flow problemsExpansion / GrowthFunding extra working capital
8 Owners’ CapitalApplies to most small businesses i.e. sole traders and partnershipsIncludes savings, redundancy pay ect.Owners are at risk of loosing their money.
9 Retained ProfitReinvesting 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!
10 Selling AssetsA 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!
11 Rover 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 £1.4bnWhy did this happen?Could this have been prevented?What other attempts do you think Rover could have made in order to recover?
12 Tighter Trade CreditReduce the length of time an outstanding bill can be paid.Putting pressure on clients to pay early.Can damage relationships with customers.
13 Reduce Stock Levels 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 ordersBad Reputation
14 Summary Owners Capital – Savings, Redundancy pay ect Retained Profit – Reinvesting or holding back profit to put back into the businessSelling Assets – Selling equipment or property to raise fundsTighter Trade Credit – Reducing length of time customers have to settle the billReducing Stock Levels – Buying less stock
15 Homework - QuestionsWhat is meant by ‘Internal Source of Finance?’ (1)Why mighta) new business need finance? (3)b) an existing business need finance? (3)Explain how retained profit can be used to finance a business? (5)
16 Choice of finance Small Businesses Medium sized businesses Sole TraderSmall BusinessesMedium sized businessesLarge corporationsPLC
17 External Sources of Finance (Finance obtained from sources outside the business)
18 Family and Friends Associated with a sole trader or partnership. Low cost finance in terms of interestLittle or no security required.This type of finance is usually quite small.
19 LoansMoney is provided by the lender, and has to be paid back with interest. (%)Fixed TermsQuick 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.
20 Over Drafts Are agreed with the bank Less expensive and more flexible than a loan.SHORT TERMCharges occur according to the amount ‘overdrawn’Lenders can remove overdraft facility at anytime.
21 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)
22 Factoring‘A service offered by a financial organisation to recover outstanding invoices’Removed burden of credit controlImproves cash flow immediatelySelling below face value. Receiving 80% or 90% of the recovered debt.Could damage relationships with customers
23 Debentures Written acknowledgement of debt A type of fixed period loan Unsecured (without collateral)Secured only by the issuer
24 Example 1….A debenture reserves your seat at the Twickenham Stadium Stadium for 10 years. (£6,000 each)
25 Venture Capital Capital mainly provided by banks or wealthy investors Expect a return in interest and part ownership of the businessConsidered a high risk investmentPopular with new companies (or ventures)
26 Business AngelsAngels typically invest their own funds, unlike venture capitalists.Expect a wealthy return and part ownership of the businessConsidered a high risk investmentPopular with new companies (or ventures)
27 Share IssueCommon 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 businessIssuing 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.
28 Government Grants /Loans 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 growthHigh Unemployment rates
29 Factors affecting the choice The amount requiredThe cost of the moneyAdvice availableChoosing a funding methodLoss of controlThe length of time for which the money is neededThe risk involved
30 Short Term Vs Long Term Loans Hire purchase Repayable within 1 year Trade CreditBank OverdraftsDebt FactoringSelling AssetsOwners CapitalRetained ProfitReducing Stock LevelsLoansHire purchaseLeasingShare IssuesMortgagesDebenturesBusiness AngelsVenture CapitalFamily and Friends (?)Repayable within 1 yearRepayable between 1 – 5 years
31 Questions1. 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?