Sources of Finance
2. Definitions Bank loan Long term loan Short term loan Interest Retained earnings Organic growth Joint venture Issue shares
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Case 1 Case 2 Case 3 Case 4 Conclusion Reference and Bibliography
Introduction In this assignment we will be looking at different sources of finance available for different type of business. Also will be looking at the definitions of different type of sources of finance, the advantages, disadvantages and also giving reasons to why different sources of finance was chosen for the given case studies.
Types of sources of finance Bank Loan – is a long term loan and will often be for large amount of money for starting up a business or to expanding. Business will agree with the bank to pay installment monthly fees with interest charge. Long term Loan – is a loan which is often being for a large sum of money and usually the payment period is more than 15 years. Usually is used for starting up new business, for expansion, buying new fixed assets for the business. Loans are usually paid on a monthly installments plus agreed fixed interest charge. Short term loan – is loan that is for a small amount within the period of 5 years, plus agreed interest charge. Interest – Banks provide services by lending money in the form of overdrafts and loans and bank will charge for this service. The extra charge is called interest, these are the profit made. The Bank of England sets an interest rate at which it lends to financial institutions. This interest rate then affects the whole range of interest rates set by commercial banks, building societies and other institutions for their own savers and borrowers. It also tends to affect the price of financial assets, such as bonds and shares, and the exchange rate, which
affect consumer and business demand in a variety of ways. Lowering or raising interest rates affects spending in the economy. (Source form www.bankofengland.co.uk)
Retained earnings – also called “Organic growth” growth generated through the development and expansion of the business, these are profit made by company. These can be achieved through: • Generating increasing sales – increasing revenue to impact on overall profit level
Used to retained profit and used reinvested into the business.
Joint Venture – also called “Issue shares” two or more parities join together to start up a business; hoping it will grow, make a profit and will be a going concern business. The joined parties will share revenue, expenses and control of the business.
Case 1: A medium-sized engineering firm with an annual return of over £ 2.5 million has decided to install a new piece of machinery to help improve its productivity. The equipment needs to be housed in a new building to be construed on the site. The forecast of the building is £ 150,000 and the equipment £400,000 The appropriate source of finance for this case would be to take 50% from the retained earnings and 50% from the bank loan. This approach will reduce the number of years to pay back in installment and will result in less amount of interest to pay from the amount borrowed.
Case 2: An individual has been made redundant after 20 years with a major organization and has received a lump sum redundancy payment of £70,000. The individual is planning to setup bookmakers and has identified suitable premises valued at £180,000 near to a major town centre shopping precincts. Joint venture will be ideal for this case, as the individual has a capital sum of £70,000 and another partner will put in a capital and will be able to borrow a smaller amount of money from the bank. The advantage for joint venture is that the risk is spread, advice will be bought in through experience and the company will be able to bring expertise for higher growth and for long term basis. And the disadvantage for is that profits will be shared with a shareholder. On the other hand the disadvantage of the bank loan will be that the bank may not be able to provide a loan due to the redundancy; unless the owner provides good business strategy plan which will forecast to give a good return and also owns an assets or security i.e. Property, land etc.
Case 3: A large plc is planning on moving a major part of its production facility to Cornwall. It has identified a site near a former chalk pit that is now not used. million.
The estimated cost of the facility is £4.5
A long term bank loan will be suitable to for a large company planning to move as the estimated cost is £4.5 million and share issue will also be ideal as this can raise capital that can be used for the move, this is a long term source of finance. Shareholders will have to share the control of business, each share gives the shareholder a vote on the direction of the company and will spread the risk to the number of shareholders, and this will also reduce the amount of loan to borrow from the bank which will also result to fewer installments and less interest to pay. Case 4: A rugby club is anticipating turning fully professional after the team secured promotion to the Zurich premiership. To take this place in league, the league committees have insisted that it also improves facilities at the ground. It has been estimated that the cost of these two measures will be £500,000. The best way to inject a source of finance in a rugby club is through finding a sponsor. A sponsor will bring money into the club and raise fund to enable the club to improve its facilities. Advantages of having a sponsor: • • The marketer can reach different target of audiences The sponsors’ logo could appear on the shirts of the players, logo on the playing field etc. • This gives different advertising that will encourage and promote increase in participation •
Sponsors can get many benefits Different advertising will encourage and promote increase in participation
If sponsors withdraw, the club may not be able to carry on Sports loss identity dictated by sponsors Less successful performers may not receive any sponsorship Bad product may damage reputation on sport
(Source from: www.arrowvale.worcs.sch.uk) Example: Etihad Airways sponsors Manchester City FC, The Abu Dhabi
based airline of the United Arab Emirates, has become official shirt sponsor of English Premier league side Manchester City in a three year deal. (Source from: www.business24-7.ae)
During the research of this assignment; I have concluded that there are many type of finance can be used at one particular time. Depending on the type of company and trying to get the best possible finance deal to save the borrower on the risk of borrowing high amount and also to pay high amount on the interest rate.
Reference and Bibliography
www.bankofengland.co.uk www.arrowvale.worcs.sch.uk www.business24-7.ae