Sources of Finance and Assistance for Business

Sources of Finance The best source should be from profits (Internal). Companies may find it more useful to use profits to finance the future of the company instead of dividing it up between either shareholders, partners or retained by the owner.

External Sources Long Term – a number of years Issuing more shares (PLC) Owner investing more of his own capital Taking out a mortgage (interest is added to the loan and must be repaid monthly) Debentures – long term loans (interest again must be paid annually and the total amount repaid in the specified period). Sale and Leaseback – selling assets such as machinery and then renting them back.

Medium Term – a few years Loan from the Bank. Banks are a valuable source of information and finance. Access to the latest info and many years of expertise in dealing with the individual needs of businesses. Offer finance solutions, assist in the planning process and give general financial advice. Usually used to buy machinery etc Interest needs to be repaid.

Short Term – within a year Overdraft from bank (interest is paid on the amount overdrawn). Debt factoring – passing debts to another company for less than the full amount. Avoids cash flow problems. Trade Credit – buying now and paying later. All are temporary.

Local Enterprise Companies Funded by government Existed for many years and are a valuable source of information for new companies in the process of starting up as well as providing info to established companies. Wide range of expertise and information including sources of finance, e.g. grants, that can be applied for.

Grants and Allowances From central or Local government For: The set up of a new business Relocation of an existing business to an area of need May have to be paid at a later date but with low interest.

Local Authorities Source of assistance but not usually with finance. Keen to help set businesses set up in their area if there is a need for such a business. Assistance can come in the form of a grant (but may need to be repaid at a later date).

Enterprise Companies Organises trade fairs for small businesses to bring together businesses from different areas of one country to enable trade to take place. Organises staff training for smaller businesses Provides advice to small businesses

European Grants Available to businesses who meet particular criteria. The amount and type of grant will depend upon the need for it.

Question Other than funds, describe the types of assistance a Local Enterprise Company could provide for an organisation. (4)

Answer Some assistance provided could be Providing training for start-up businesses Business managers will give advice on financial planning Assistance with preparing a business plan Can give advice on the type of business organisation to choose Providing useful local contacts Providing free office/accommodation for a period of time Advising on location Advising on local market/competitors

Question Describe and justify 3 sources of finance that could be used by a partnership. (A different justification must be used each time) (6)

Answer Partners could increase their own investment by putting more of their own money into the business. This would mean the partners retain the same control without having to dilute control by bringing in a new partner. Partners could get a bank loan. The loan will be over a set period of time with interest paid back. This is a simple way of increasing finance without having to alter any partnership agreement. They could apply for a Government Grant. This would be funds into the business from the government that does not have to be paid back

Answer They could bring in a new partner who invests their own money into the business. This brings in fresh finance that does not stretch the original partners OR mean the original partners have to find the funds. They could use Trade Credit by increasing credit terms with suppliers. This allows for an increase in finance without bringing in a new partner They could use Debt Factoring whereby they sell their debts at a reduced rate. This would mean that they get funds immediately without having to chase unpaid debts.

Answer They could use their Bank Overdraft. This would be an arrangement whereby they could withdraw money they do not actually have in their bank account and repay with interest. This would be a very temporary solution and partners would not have to alter their agreement They could use Hire Purchase. This is when they purchase equipment to use now and pay for in instalments with interest. Repayments are fixed and budgeting is made easier. They could choose to Lease assets. This is when they hire equipment and pay a monthly fee. They would not be responsible for the repairs and maintenance.

Question Describe 4 different sources of long term finance available to a private limited company. (4)

Answer Bank loan – paid back over a number of years with interest – time or interest payable Commercial mortgage – paid back over a long period with interest – commercial or property must be mentioned together with time or interest payable Venture capitalists – invest in an organisation if a more risky venture is undertaken/may request a share in the organisation in return Invite new shareholders to invest in the organisation Local/national government grants which do not have to be paid back

Answer Sale and leaseback of any assets will gain finance Sell off unwanted assets to raise finance Retained profits of the organisation reinvested