1. 3.3.4 Financing growth A palace shirt A dark verb font Lasses teas
Work out the following sources of finance:
A palace shirt
A dark verb font
Lasses teas
Refined patriot
3.3.4 Financing growth
3.3.4 Financing growth

2. Why do businesses need finance?
Expansion
Start-up costs
Replace or upgrade machinery
Relocation
Meet short term cash flow shortages
Purchase new stock
In an examination always consider what the finance is
needed for as this will help you justify an appropriate source.
3.3.4 Financing growth

3. Internal and External Sources of Finance
From sources outside the business
Share capital (equity)
Share issues
Stock market flotation
Debt
Overdrafts
Loans
Internal
From within the business
Reinvesting profits
Sales of assets
Businesses may have to use more
than one source of finance.
Consider:
what it is needed for?
how much is needed?
the financial status of the business
3.3.4 Financing growth

4. Retained profit
Profit kept within the business from profit after tax to help finance future activity
Profit will either be retained, in which case it becomes part of total equity, or distributed as dividends
A business with a corporate objective of growth is likely to want to maximise retained profit without alienating shareholders
3.3.4 Financing growth

5. Sale of Assets An asset is something that is owned by a business
3.3.4 Financing growth
Sale of Assets
An asset is something that is owned by a business
Vehicles
Land
Machinery
A business can sell off assets that it no longer requires
Alternatively it may choose to sell off an asset and then lease it back

6. Sale of Assets Advantages Disadvantages Quick capital injection
3.3.4 Financing growth
Sale of Assets
Advantages
Quick capital injection
If no longer required does not affect operations
Can lead to other efficiencies
Can reduce overhead costs
Disadvantages
One off action
Leasing can increase costs in long run
Can cause speculation
Money raised may be limited

7. What is the difference between an Ltd and a Plc?
3.3.4 Financing growth
Share Issue
Shares represent ownership of a company. If you hold one share worth £1 in a multi-billion £ company then you are a part owner
Shareholders will receive a dividend (a share of the profits) and be given a voting right (one vote per share)
The amount of dividend payable will vary year on year and depend upon
Profit levels
Company objectives
Appropriate source for raising large amounts of finance
Only an option for companies (Ltds and Plcs)
What is the difference between an Ltd and a Plc?

8. Stock market flotation
3.3.4 Financing growth
Stock market flotation
Selling a percentage of your business to the general public in the form of shares. These can then be traded on a stock market, a place to buy and sell shares.
Advantages
Access to greater capital
Increased public profile of the business
Share option schemes to motivate staff
Allows the owner to realise some of the value of the business whilst retaining control
Disadvantages
Costs involved in process
Greater legal responsibilities
Information is made available to competitors
Might be vulnerable to unfriendly takeover

9. Equity capital can also come from two other sources
3.3.4 Financing growth
Equity Capital
Equity capital can also come from two other sources
1. Business Angel investors
Wealthy individuals that are looking for an investment opportunity where they provide funding and expertise in exchange for a share of the business.
2. Venture Capitalists
Similar to business angels, these are firms that provide investment for smaller businesses that they consider to have growth prospects.
Visit Angels Den to find out more

10. Potential investors 9 10 8 12 13 7 11 6 1 End 2 3 5 4 14 15 26 25 27
The Dragons on “Dragons’ Den” invest money in businesses in return for a % equity. Can you name the Dragons? 9 10 8 12 13 7 11 6 1
End 2 3 5 4 14 15 26 25 27 28 30 29 24 23 18 17 19 20 22 21 16

11. Bank Loans
Loan capital is when a lender provides capital (money) to a borrower, and the borrower agrees to repay the borrowed money with interest, over a period of time.
Bank Loans – these are usually for a specific time period e.g. 5 years and carry a fixed rate e.g. 6% of the initial sum on a yearly basis.
Banks may require security on the loan, known as collateral. This can be an asset of the business owner or the company e.g. house, delivery van, factory
A shorter term source of finance may be a bank overdraft:
Bank Overdrafts – an extension of credit from a bank. This allows firms to borrow money (go overdrawn) from their bank account.
A bank loan needs to be approved!
The Little Rascals - Bank Loan
3.3.4 Financing growth

12. Bank Loans Disadvantages Advantages
Interest must be paid regardless of profit levels
A firm normally provides security (collateral) against its assets
Often more expensive than other forms of finance – a firm can be charged for early payment
Advantages
Quick and easy to secure
Fixed interest rates allowing firms to budget
Improved cash flow - vital for a small business
The borrower retains ownership of the company

13. Bank Overdrafts Advantages Disadvantages
Only borrowed when required allowing flexibility
Only pay for the money borrowed
Quick and easy to arrange
No charges for paying off the overdraft
Disadvantages
The bank can call it in at any time
Only available from your current bank account
Interest payments tend to be variable – making it more difficult to budget
Banks may secure the overdraft against the business’ assets
3.3.4 Financing growth

14. Debt versus equity Debt Equity
You do not have to give up part of your business in shares
Quick and easy to access
Debts can be deducted from profit to lower tax
However
Interest has to be paid
Your business or personal belongings e.g. house may be used as collateral
Equity
Does not have to be repaid
Can bring in experience of the investor
New shares can be issued for fresh investment
However
Could be vulnerable to takeover
Costs time and money
Investors will demand a share of profits in the form of dividends
3.3.4 Financing growth

15. Activities – Raising Finance
3.3.4 Financing growth
Activities – Raising Finance
State and justify an appropriate source of finance for the following purchases for a florist setting up as a sole trader
Delivery Van
Additional Stock
Premises
Advertisement in local paper
How would your recommendations change if you were a Limited Company
Why is a florist unlikely to secure the financial backing of a Venture Capitalist?

16. 3.3.4 Financing growth
Question time
Business finance can come from either internal or external sources.
Which two of the following are external sources of finance?
Sale of assets
Retained profit
Bank loan
Venture capital (2)
Give one advantage of using retained profit to finance business growth. (1)
Give one disadvantage of using sale of assets to finance business growth. (1)
A business needs to borrow £ to upgrade its fleet of delivery vans. It is considering borrowing the money from a bank. Explain one disadvantage of borrowing money from a bank (3)
State and justify one alternative method of financing the upgrade. (3)