you will learn... why businesses need finance the different sources available how managers choose...
TRANSCRIPT
BUSINESS FINANCING
You will learn ...
Why businesses need finance
The different sources available
How managers choose between the different sources
Why do businesses need
finance?
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Why Do Businesses Need Finance?
To start up the business To expand the business To deal with difficulties
facing the business Capital Expenditure Revenue Expenditure
Types of Expenditure
Capital Expenditure Revenue Expenditure
Money spent on Fixed Assets
more than one year
Money spent on day-to-day expenses
Types of Expenditure
ItemRevenue
Expenditure
Capital
Expenditure
Purchase of Building
Water Rates
Staff Wages
Office Computer
Gym Equipment
Maintenance of
Equipment
Sources of business
finance
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Internal Sources of Finance
Retained Profits
Sale of Surplus Assets
Selling Stocks
Owners Savings
Internal Sources of Finance
Internal Sources of Finance Retained profit (ploughed back profit)Profit kept in the business after the owners have taken their share of the profits.
AdvantageNo repayment
X DisadvantageX New BusinessesXProfits too low to expandXMore profit kept, less goes
to owners
Sale of Business AssetsCould be those that are no longer used or outdated.
AdvantageBetter use of capital
X DisadvantageX Time ConsumingX Not available to
small business
Internal Sources of Finance
Running Down StocksUsed to raise cash
AdvantagesReduced Opportunity CostSave on Storage Costs
X DisadvantageXStock ShortagesXDisappointed Customers
Internal Sources of Finance
Owner’s MoneyPut more of their savings into the business
AdvantagesAvailable QuicklyNo Interest Payments
X DisadvantageXLow SavingsX Increased Risk
Internal Sources of Finance
External Sources of FinanceIssue ofShares
Debentures
DebtFactoring
Grants & Subsidies
External Sources of Finance
Bank Loan
External Sources of Finance Issue of shares
PLC’s only
Money obtained from individuals or institutions outside the business
AdvantagesPermanent Source of CapitalNo Interest Payments
X DisadvantagesXDividendsXOwnership Rights
External Sources of Finance Bank Loan
AdvantagesQuick to organizeVaried lengths of timeLow Interest Rates Large
CompaniesBorrow Large Sums
X DisadvantagesXRepaid with InterestXSecurity or Collateral
External Sources of Finance Debenture
L-T Certifi cates issued by limited companies
AdvantagesRaise very L-T finance
X DisadvantageXCreditworthiness &
reputation essentialXRepaidX Interest
External Sources of Finance Factoring Debts
Debt factors are specialist agencies that “buy” debts of fi rms for immediate cashThey may off er 90% of the existing debt.The debtor will then pay the factor and the 10% represents as the factor’s profi t
External Sources of Finance Factoring Debts
client customer
MFC
Goods delivered & invoiced for $100
Copy of invoice
to MFC
MFC gives $75
imm
ediately
MFC fo
llows
up
paym
ent with
cust
omer
Sends
paym
ent t
o
MFC
External Sources of Finance Factoring Debts
AdvantagesImmediate Cash AvailableRisk of Collecting Debt Factor
X DisadvantagesXFirm does not receive 100%value of
debt
External Sources of Finance Grants & Subsidies by
Outside AgenciesE.g. Government
AdvantagesRepaying usually not required
X DisadvantagesX“Strings Attached”
X E.g. relocation
Periods of Finance
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Periods of FinanceOverdrafts Trade
Creditors
Medium-Term
Long-Term
Period of Finance is required for
Short-Term
Debt Factoring
LeasingHire
Purchase
Loans
LoansSale of
Shares
Debentures
New Issue
Rights Issue
Periods of Finance
Short-Term (S-T) < 3 years
Medium-Term (M-T) 3 yrs to 10yrs
Long-Term (L-T) > 10 years
S-T Finance - Overdrafts
S-T Finance Overdraft
Arranged by bankAdvantages
Spend more money than available in bank account
Can be used for wages, paying suppliers etc
Flexible form of borrowingX Disadvantages
X Interest rates variableXShort time to repay
S-T Finance
Trade CreditBusinesses delay paying its suppliersLeaves business in better cash position
manufacturer
customer
Customer buys supplies from manufacturer
Time period to pay for supplies bought
S-T Finance
Trade Credit
AdvantagesAlmost Interest FreeLength of Time to Pay Debt
X DisadvantagesXPossible Refusal of Discounts XRefuse Goods Payment Slow
S-T Finance Debt Factoring
client customer
MFC
Goods delivered & invoiced for $100
Copy of invoice
to MFC
MFC gives $75
imm
ediately
MFC fo
llows
up
paym
ent with
cust
omer
Sends
paym
ent t
o
MFC
MFC pays
balance
Medium-Term Finance
Payments
Payments
Hire Purchase
Leasing
Own the Equipment
Return Equipment
Option to Buy
Medium-Term Finance
Hire PurchasePurchase fixed asset over longer period of time
AdvantagesNo “up-front” Large Sum of Money
Needed for AssetX Disadvantages
XCash Deposit Needed at BeginningX Interest Rates High
Medium-Term Finance
LeasingAllows firm to use the asset without purchasing itCan be purchased at end of leasing period
AdvantagesNo “up-front” Large Sum of Money
Needed for AssetMaintenance done by Leasing Company
X DisadvantagesX Total Cost Higher
Long-Term Finance
Issue of Shares - Equities FinanceOnly available to limited companies
Public Limited Companies
Long-Term Finance
Issue of Shares - Equities FinanceOnly available to limited companies
Public Limited Companies
New Issues
Rights Issues
• Very Large Sums• Expensive to Organize & Advertise
• Raise Additional Capital• Existing Shareholders
Long-Term Finance Issue of Shares - Equities
Finance
AdvantagesPermanent CapitalNo Repayments No Interest
X DisadvantagesXDividends Paid After TaxX Balance of Ownership
Medium-Term Finance
Bank Loan
AdvantagesX Disadvantages
Long-Term Finance
L-T LoansDebt Finance
Interest paid before tax
Interest paid every year,
dividends do not
Must be repaid
Not Permanent Capital
Secured against Collateral
Long-Term Finance
Debentures(Same as External Finance)
AdvantagesLong-term loan certificatesOften no collateral needed
X DisadvantagesX Creditworthiness & reputation essentialX Repaid with Interest
Exercise
Source of Finance
Short-Term (S-T)
Medium-Term (M-T)
Long-Term (L-T)
Overdraft
Debentures
Issue of Shares
3-yr Bank Loan
Trade Credit
Hire Purchase
Exercise
Need for Finance
Most Suitable Source
Reason for Choice
Planned take-over of another business
Temporary increase in stocks over
summerPurchase of new car
for the CEO
R & D of new productLaunch in market in
4 yrsCost of Factory – Less land than at
present
Choosing the right Source of
Finance
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Choosing the right Source of Finance
Size Control
PurposeTime Period
Amount Needed
Risk
Status
Gearing
Choosing the right Source of Finance
Risk
Gearing
Risk is the danger that failure or loss will occur.
Gearing is a measure of risk. The proportion of
total capital raised from L-T loans.
Will banks lend and shareholders
invest?
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Will banks lend you the money?
Stability of finance
records and information
Cash-Flow Forecast
Future Business Plans
Profit & LossReason for the
loanGearing
Will shareholder’s invest?
Financial Information
Share price variation
Future Business
Plans
Profit & LossDividend
RateGearing
Will the shareholders invest?
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Will shareholders invest?
Compare Dividend Rates
Compare Future Company Prospects
Share Price Variation
Gearing ratio
Business Plans
Business Objectives
Important Details Operations Finances
Business Plans force owners to think ahead and plan carefully for first the few years
Business Plans Considerations
Can we break-even or make a profit?
Where will the firm be located?
What machinery will the firm need?
How many staff does the firm need?
What to make? products
What consumers are we aiming at?
What will be the main costs?
How many products to make?
Pizza Place Ltd Business Plan
Pizza Place Ltd Business Plan
QUICK QUIZ!
What can you use an overdraft for? How long is a source of finance
needed to be considered medium term?
Name one thing the bank manager needs to get from you before granting a large loan?
What is the difference between rights issue and new issues of share?
MORE
Which of these are short, medium, or long term sources of finance?
Overdraft
5 year loan
Issue of shares
Debenture
Trade credit
Hire purchase
Which of these are internal or external sources of finance?
Bank loanRetained profitOwner’s savingGovernmental grantsSale of unused asset