Financing Growth Unit 3 Topic 3.3.4

Aims for today To identify ways of financing a business from Internal & external sources. To be able to recommend and justify the most appropriate source of finance to fund the growth of different businesses. To understand how to finance a business from Internal & external sources

To understand how to finance a business from Internal & external sources

Growing a business To understand how to finance a business from Internal & external sources

Why might a firm want to grow larger? Make a list or mind map of the reasons why a firm may want to grow larger. To understand how to finance a business from Internal & external sources

Why do firms want to grow? To understand how to finance a business from Internal & external sources

How can firms grow? The type of integration that firms use will depend on their situation. There are 3 ways it can be done: Internal Expansion – Expand by opening more outlets or employing more staff Mergers – Two businesses joining together to form a new or larger company Takeovers – Where one business buys at least 15% of another business to control it To understand how to finance a business from Internal & external sources

Financing Growth Getting bigger requires investment. This can come from 2 main sources: To understand how to finance a business from Internal & external sources

Sources of finance Personal savings Retained profit Working capital Internal External Personal savings Retained profit Working capital Sale of assets Ordinary shares Debentures (secured loans) & other loans Overdrafts Hire purchase Trade Credit Grants Venture capital To understand how to finance a business from Internal & external sources

Task 1: In pairs C grade: Summarise the Internal and external finance options that a business may have. B grade: Explain the advantages and disadvantages of each method. A grade: Recommend and justify the most suitable method for a small bakery, a LTD and a franchise. To understand how to finance a business from Internal & external sources

Internal Sources of finance To understand how to finance a business from Internal & external sources

1. Retained profit When a business makes a profit and keeps it rather than spending it, it is called: RETAINED PROFIT The retained profit is available to use within the business, for developing the business or for a ‘rainy day’. To understand how to finance a business from Internal & external sources

2. Selling assets When a business sells off fixed and current assets which it no longer needs in order to raise finance for new projects. Fixed assets -buildings, land & equipment. Current assets - cash, stock & money owed. To understand how to finance a business from Internal & external sources

3. Owners Capital or savings When the owner uses his or her own savings to invest in the business. Usually a sole trader will part finance a new business with their own savings. To understand how to finance a business from Internal & external sources

External Sources of finance To understand how to finance a business from Internal & external sources

1. Share capital - The monetary value of a company - Shareholders invest in a company (they have part ownership of it). An entrepreneur may use their personal savings (e.g. £5,000) as their share and they get others to invest as well. Only Public Limited Companies (PLC’s) can sell shares on the stock market. To understand how to finance a business from Internal & external sources

2. Venture Capitalists A person or company who buys shares in a business that they hope will grow fast. In the long term, they will sell the shares at a profit and often reinvest in other companies. The main sources of venture capital in the UK are venture capital firms and "business angels" - private investors. Separate Tutor2u revision notes cover the operation of business angels. In these notes, we principally focus on venture capital firms. However, it should be pointed out the attributes that both venture capital firms and business angels look for in potential investments are often very similar. What is venture capital? Venture capital provides long-term, committed share capital, to help unquoted companies grow and succeed. If an entrepreneur is looking to start-up, expand, buy-into a business, buy-out a business in which he works, turnaround or revitalise a company, venture capital could help do this. Obtaining venture capital is substantially different from raising debt or a loan from a lender. Lenders have a legal right to interest on a loan and repayment of the capital, irrespective of the success or failure of a business . Venture capital is invested in exchange for an equity stake in the business. As a shareholder, the venture capitalist's return is dependent on the growth and profitability of the business. This return is generally earned when the venture capitalist "exits" by selling its shareholding when the business is sold to another owner. Venture capital in the UK originated in the late 18th century, when entrepreneurs found wealthy individuals to back their projects on an ad hoc basis. This informal method of financing became an industry in the late 1970s and early 1980s when a number of venture capital firms were founded. There are now over 100 active venture capital firms in the UK, which provide several billion pounds each year to unquoted companies mostly located in the UK. What kind of businesses are attractive to venture capitalists? Venture capitalist prefer to invest in "entrepreneurial businesses". This does not necessarily mean small or new businesses. Rather, it is more about the investment's aspirations and potential for growth, rather than by current size. Such businesses are aiming to grow rapidly to a significant size. As a rule of thumb, unless a business can offer the prospect of significant turnover growth within five years, it is unlikely to be of interest to a venture capital firm. Venture capital investors are only interested in companies with high growth prospects, which are managed by experienced and ambitious teams who are capable of turning their business plan into reality. For how long do venture capitalists invest in a business? Venture capital firms usually look to retain their investment for between three and seven years or more. The term of the investment is often linked to the growth profile of the business. Investments in more mature businesses, where the business performance can be improved quicker and easier, are often sold sooner than investments in early-stage or technology companies where it takes time to develop the business model. http://tutor2u.net/business/finance/raising_finance_venture%20capital.htm To understand how to finance a business from Internal & external sources

3. Loans An amount of money is borrowed from the bank and then repaid with interest over a set period of time. The loan period can range from 1 year to 10 years. Look for the APR amount – the higher the APR the more interest is paid. To understand how to finance a business from Internal & external sources

4. Grants Some businesses may get grants to help them start up (especially small businesses). Organisation such as the Princes Trust give business start up grants to young people up to the age of 30. Grants are also available from the government and the European Union. Grants DO NOT have to be repaid To understand how to finance a business from Internal & external sources

5. Bank overdrafts An overdraft facility is where you can use more money than you actually have in an account. An overdraft of £2,000 would let you go £2000 ‘in the red’ which may help a business in the short term. Personal overdrafts tend to be between £100-£1000. To understand how to finance a business from Internal & external sources

6. Trade credit TRADE CREDIT is when a supplier allows you a period of time (such as 30 days) to pay for goods and services. However, your customers may also expect TRADE CREDIT so the advantages of this can be cancelled out! To understand how to finance a business from Internal & external sources

(instead of waiting the typical 30 days to be paid) 7. Factoring Is where a business is able to receive cash immediately for the invoices it has issued from a FACTOR such as a bank (instead of waiting the typical 30 days to be paid) A FACTOR is a financial service company like a bank and they charge a fee for this service. To understand how to finance a business from Internal & external sources

Page 8 Mini book To understand how to finance a business from Internal & external sources

Task 2: Role play You are a small business advice officer in a bank. Your client, Sam runs a successful mobile hairdressing business which he hopes to expand nationally within the next 3 years. Explain the advantages & disadvantages of different types of finance for Sam’s business and make some recommendations to him. Ext: Explain issues with the availability of finance (pg82) and then select the most suitable source for his firm. What issues does he need to consider when using the chosen method of finance? To understand how to finance a business from Internal & external sources

Task 3: Finance matching activity Retained profit Shareholders Personal savings Share Short term finance Long term finance Leasing Loans Grants Profit that is kept and usually reinvested in the business Part ownership in a business Money that is borrowed or invested for more than 1 year Money that the business has to repay quickly like an overdraft Renting of premises or equipment Money that a person has kept aside Money that does not have to be repaid. Often from the Government or EU A sum of money that has to be repaid with interest over a certain period. The owners of a company Where a business is able to receive cash in advance for the invoices it has issued. Factoring

Task 3: Finance matching activity Retained profit Shareholders Personal savings Share Short term finance Long term finance Leasing Loans Grants Profit that is kept and usually reinvested in the business Part ownership in a business Money that is borrowed or invested for more than 1 year Money that the business has to repay quickly like an overdraft Renting of premises or equipment Money that a person has kept aside Money that does not have to be repaid. Often from the Government or EU A sum of money that has to be repaid with interest over a certain period. The owners of a company Where a business is able to receive cash in advance for the invoices it has issued. Factoring

Solutions Retained profit Shareholders Personal savings Share Short term finance Long term finance Leasing Loans Grants Profit that is kept and usually reinvested in the business Part ownership in a business Money that is borrowed or invested for more than 1 year Money that the business has to repay quickly like an overdraft Renting of premises or equipment Money that a person has kept aside Money that does not have to be repaid. Often from the Government or EU A sum of money that has to be repaid with interest over a certain period. Factoring Where a business is able to receive cash in advance for the invoices it has issued. The owners of a company To understand how to finance a business from Internal & external sources

Task Complete Worksheet 42 Financing growth To understand how to finance a business from Internal & external sources

Plenary: Finance Bingo Draw a 9 box grid Choose 9 keywords from orange box and write them in. Long term Short Term Overdraft Factoring Loan Mortgage Leasing Share Dividend Savings Retained profit Collateral Venture capitalist Trade Credit Shareholder Share Capital TEXTBOOK DEFINITIONS ON PAGE Make a 6 box grid. Choose 6 keywords from the options and write one word in each box. Listen for the definitions, if you have the matching keyword, cross it out. The Winner is the person to get a Full House first (all 6 words). To understand how to finance a business from Internal & external sources

Give us a clue!– Identify the Long term Finance keywords Dividend Grants Venture Capitalists Mortgage Collateral Share capital Shareholders To understand how to finance a business from Internal & external sources