8/2/2019 iem a

1/13

http://www.bized.co.uk

Copyright 2006 Biz/ed

Sources of Finance

8/2/2019 iem a

2/13

http://www.bized.co.uk

Copyright 2006 Biz/ed

Sources of Finance

8/2/2019 iem a

3/13

http://www.bized.co.uk

Copyright 2006 Biz/ed

Business Growth

8/2/2019 iem a

4/13

http://www.bized.co.uk

Copyright 2006 Biz/ed

Internal Sources of Finance and Growth

Organic growth growthgenerated through thedevelopment and expansionof the business itself. Can be

achieved through: Generating increasing

sales increasing revenueto impact on overall profitlevels

Use of retained profit

used to reinvest in thebusiness

Sale of assets can be a

double edged sword reduces capacity?

Selling more? Mind the queues.

Copyright: iStock.com

8/2/2019 iem a

5/13

http://www.bized.co.uk

Copyright 2006 Biz/ed

External Sources of Finance

Long Term may be paidback after many years or notat all!

Short Term used to coverfluctuations in cash flow

Inorganic Growth growthgenerated by acquisition

The existence of capital markets enable firms to raiselong term loans and share capital.

Copyright: Photolibrary Group

8/2/2019 iem a

6/13

http://www.bized.co.uk

Copyright 2006 Biz/ed

Long Term Shares (Shareholders are part owners of a company)

Ordinary Shares (Equities):

Ordinary shareholders have voting rights

Dividend can vary

Last to be paid back in event of collapse

Share price varies with trade on stock exchange Preference Shares:

Paid before ordinary shareholders

Fixed rate of return

Cumulative preference shareholders have right to dividend carriedover to next year in event of non-payment

New Share Issues arranged by merchant or investment banks Rights Issue existing shareholders given right to buy new

shares at discounted rate

Bonus or Scrip Issue change to the share structure increases number of shares and reduces value but marketcapitalisation stays the same

8/2/2019 iem a

7/13

http://www.bized.co.uk

Copyright 2006 Biz/ed

Long term

Loans (Represent creditors to the company not owners)

Debentures fixed rate of return, first to be paid

Bank loans and mortgages suitable for small tomedium sized firms where property or some otherasset acts as security for the loan

Merchant or Investment Banks act on behalf ofclients to organise and underwrite raising finance

Government/EU may offer loans in certaincircumstances

Grants

8/2/2019 iem a

8/13

http://www.bized.co.uk

Copyright 2006 Biz/ed

Short Term Bank loans necessity of paying interest on the payment,

repayment periods from 1 year upwards but generally nolonger than 5 or 10 years at most

Overdraft facilities the right to be able to withdraw fundsyou do not currently have

Provides flexibility for a firm

Interest only paid on the amount overdrawn

Overdraft limit the maximum amount allowed to be drawn- the firm does not have to use all of this limit

Trade credit Careful management of trade credit can help

ease cash flow usually between 28 and 90 days to pay Factoring the sale of debt to a specialist firm who secures

payment and charges a commission for the service.

Leasing provides the opportunity to secure the use of capitalwithout ownership effectively a hire agreement

8/2/2019 iem a

9/13

http://www.bized.co.uk

Copyright 2006 Biz/ed

'Inorganic Growth'

Acquisitions

The necessity offinancing externalinorganic growth

Merger:

firms agree to jointogether both mayretain some form ofidentity

Takeover: One firm securescontrol of the other, thefirm taken over maylose its identity

Safeway subject to a 3 billion takeover byMorrisons. Securing the 3 billion necessary is aspecialist job.

8/2/2019 iem a

10/13

http://www.bized.co.uk

Copyright 2006 Biz/ed

Business Angels

8/2/2019 iem a

11/13

http://www.bized.co.uk

Copyright 2006 Biz/ed

Business Angels

Individuals looking for investmentopportunities

Generally small sumsup to 100,000

Could be an individual

or a small group Generally have some sayin the running of the company

8/2/2019 iem a

12/13

http://www.bized.co.uk

Copyright 2006 Biz/ed

Venture Capital

8/2/2019 iem a

13/13

http://www.bized.co.uk

Copyright 2006 Biz/ed

Venture Capital

Pooling of capital in the form of limitedcompanies Venture Capital Companies

Looking for investment opportunities in fast

growing businesses or businesses with highlyrated prospects

May also buy out firms in administrationwho are going concerns

May also provide advice, contactsand experience

In the UK, venture capitalists have invested50 billion since 1983