Business Studies Sources Of Finance

What do these companies have in common?

Objectives Understand internal and external sources of finance Apply knowledge to a case study that will be marked An appreciation of the appropriateness of different sources of finance for different projects

Government Influences The government have always helped business, like the North East when the ship building industry declined. Regional selective assistance – Government grants for investment projects that would safeguard jobs in assisted areas. These are areas with available workforce and flexibility for example. EU structural and cohesion funds – The EU main way of supporting social and economic restructuring. Used to tackle regional disparity, infrastructure, resources etc. Regional Development agency – A government body that promotes economic development.

Government Influences Learning and skills council – Aims to make England better skilled and more competitive. European Investment Bank – Gives grants to UK industries. Public sector operations – Government locates offices in areas facing difficulties in order to directly influence employment and spending.

Why does a business need finance? When it is STARTING UP When the firm has a CASH FLOW problem When it wants to EXPAND This is called start-up capital, it is where large sums of money may have to be borrowed to pay for all start-up cost e.g. premises, equipment & stock A firm needs a steady supply of funds to pay the costs of producing more goods and services. Finance must be available to cover any temporary cash shortages. e.g. more money going out then coming in. Firms may need finance to fund expansion. e.g. if they need to buy bigger premises

Choice Of Finance Cost - looking for least expensive Use of funds – usually funded by L/T finance Status and size – sole traders are limited to finance available to them Financial situation – cost of borrowing rises when your business is doing badly Gearing – the relationship between loan and share capital Loan capital is geared Highly geared companies are more likely to issue shares

Internal Finance Working capital – operate a tighter credit policy? ‘Organic growth’ – growth generated through the development and expansion of the business itself. Can be achieved through: Generating increasing sales – increasing revenue to impact on overall profit levels Use of retained profit – used to reinvest in the business Sale of assets – can be a double edged sword – reduces capacity? (Scottish & Newcastle 2003)

Activity Another option is sale and lease back. This involves selling an asset, such as property or machinery to a specialist company that leases the asset back to the seller. In 2007 HSBC agreed to sale and leaseback its head office in Canary Wharf, London for £1.09 billion. Metrovacesa took a 998 year lease while HSBC retains full control. They lease the building back for 20 years with an annual rent of £43.5 million with options to extend. What are the benefits and drawback to HSBC for using this method of internal Finance? (6)

External Finance: Short Term Bank loans – necessity of paying interest on the payment (1-10 yrs) Overdraft facilities – the right to be able to withdraw funds you do not currently have Provides flexibility for a firm Interest only paid on the amount overdrawn Overdraft limit Trade credit – Careful management can help ease cash flow – usually between 28 and 90 days to pay Factoring – the sale of debt to a specialist firm who secures payment and charges a commission for the service. Leasing – provides the opportunity to secure the use of capital without ownership – effectively a hire agreement

External Finance: Long Term Shares (Shareholders are part owners of a company) Ordinary Shares (Equities): Ordinary shareholders have voting rights Dividend can vary Last to be paid back in event of collapse Share price varies with trade on stock exchange Preference Shares: Paid before ordinary shareholders Fixed rate of return Cumulative preference shareholders – have right to dividend carried over to next year in event of non-payment New Share Issues – arranged by merchant or investment banks Rights Issue – existing shareholders given right to buy new shares at discounted rate Bonus or Scrip Issue – change to the share structure – increases number of shares and reduces value but market capitalisation stays the same

External Finance: Long Term Loans (Represent creditors to the company – not owners) Debentures – fixed rate of return, first to be paid Bank loans and mortgages – suitable for small to medium sized firms where property or some other asset acts as security for the loan Merchant or Investment Banks – act on behalf of clients to organise and underwrite raising finance Government/EU – may offer loans in certain circumstances Grants Mortgage Venture capital

Inorganic Growth Acquisitions - The necessity of financing external inorganic growth Merger: firms agree to join together – both may retain some form of identity Takeover: One firm secures control of the other, the firm taken over may lose its identity Google took over YouTube for £880 million. Under the deal, YouTube will remain a separately branded entity. Google will pay for the company entirely in shares.

Problems Of Finance Overtrading like coffee shops, expanding to quickly, organic growth better High repayments Problems managing cash flows Timings of finance

Plenary Understand internal and external sources of finance Apply knowledge to a case study that will be marked An appreciation of the appropriateness of different sources of finance for different projects Q & A