P4- Sources of Finance Name Dominic Clark Introduction: In this piece of work I have provided accounting advice on the set up of my friends new hairdressing business as a result of taking an accounting course to strengthen my employability skills. I have described the various sources of potential finances from institutions, which include loans and grants, as well as looking at government and personal sources of finance. I have then looked into identifying how these finances are accessed.
Long Term
Medium Term
Short Term
Finances the whole business
over many years
Finances major projects or
assets over a long-life
Finances day to day trading
of a business
Debentures - This works very much like shares in a
business. Investors purchase debenture certificates from the business, and can be resold to other investors (should the first investor need immediate funds). The company provides each of their debenture investors with an interest year-on-year for a specific timeframe. Businesses must be incorporated to use this form of finance.
Hire Purchase - This is basically a credit method for
a business to not pay for a product/service immediately, they are entitled to pay this back over a given timeframe. This is beneficial as the company would not have to pay for the product/service upfront in a large amount, but rather in small chunks over some time.
Bank Overdraft - This is when a companys funds are in a
negative balance. A bank will allocate a maximum amount of negative balance for firms. This is useful for short term financing as companies can withdraw excess funds (more than there is in the account).
Long-Term Bank Loan - This is a loan that is funded
by a bank which must be paid pack with interest remittences. These interest rates may be fixed or have the possibility of varying year-on-year. This would be the result of governments raising the base rate. Payments must be paid regularly as specified by the lending firm.
Leasing - This is a method where a company are entitled to
use a product or service by paying regular rental remittence. This entitles companies to utilise products and services for a cheaper price. This is usually specified on an official contract set over a period of time. When the contract comes to an end, so does the lease, and the company may use more updated goods on a new contract that they may start.
Debt Factoring - When some companies sell good/services,
they can sometimes sell it on credit. These companies have official records of the balance owed to them by their debtors. For a company to seek immediate finance, they can sell their Debtors Book to another firm at a lower price than the actual value to raise capital.
Venture Capital - These are firms which a specially set up to invest
in companies looking for funds, which banks do not agree to finance due to risky measures. As a result of financing these businesses, venture capitalists take an equity of the company, if they believe the return would be satisfactory. These could also be Business Angels who are wealthy investors looking for opportunities to put their money into, to gain equity in potentially successful businesses. An example of this is seen on the UK television show Dragons Den.
Medium-term Bank Loans - This is basically a bank
loan that is paid back within a shorter term. This means that the company must pay back their loans faster, and should they not be able to, they may be liable to legal consequences.
Trade Credit - Some goods and services are sold to
businesses using credit transactions. These transactions have a timeframe in which the payment has to be made, which could be a few weeks or even up to a month. What this means is that the business purchasing the goods can actually resell the product or use the product to generate business before paying for the product/service.
Government Aid - Occasionally governments will
issue aid in regards to finances to companies. Such funds may be sourced from governments at different levels (i.e local or central). This is mainly popular amongst firms looking to start up or expand in weak economical locations.
Building Societies - These offer funds to businesses in the of
loans, business accounts, commercial mortgages or overdraft. This is dependant on the business plan of the business. Building societies will base the decision to invest, as well as the interest rate, based on how risky the business is.
Friends and Family - Investments and financial boosts from
close individuals can be the easiest form of obtaining finances for a start-up business. This can be either paid back as a loan, or the business director may issue shares to these individuals.
Equity - When limited companies are established
equity would be the primary origin of finances for that respective firm. Shares would be distributed, and in return shareholders would provide investments to make payments for the business start up. The maximum capital being put into the business must be stated in the memorandum of association document (a legal corporation document).
Hairdressing Business Finances
The best sources of finance for starting up a hairdressing business would be for Paul to source his hairdressing supplies form suppliers that allow him to make purchases on trade credit, where he can begin to generate income before paying back the costs for his supplies. He should seek funds from close friends/family to allow him to minimise loans and interest rates. Finally, he should attempt to obtain a high overdraft maximum to allow Paul to pay for goods/services without having the funds in his bank account if he needs to. For paul to keep his hairdressing equipment updated regularly, without making large payments, he should utilise hire purchases to not have to purchase equipment, but at the same time using the best tools for the business. Regarding his establishment, it may be best for him to rent commercial property in apposed to purchasing it, if he wishes to expand in the future. Should Paul wish to open his hairdressing salon in a less developed location, he may want to seek financial aid from building societies and the government. Utilising a medium-term loan is very risky, and given the hairdressing market is so broad, I would not recommend it. For the expansion of Pauls salon, he should approach venture capitalists only if he has a very unique product that would appeal to such organisations. If not, the best options for his business would be to sell debentures or to give out equity for immediate funds. If he is looking to expand without giving out parts of his business, the most viable option would be to take out a long term loan for expansion.
Examine Two External Sources of Finance
that Kellett School could have used to Finance its Capital Expenditure Equity - This method is for Kellett school to seek investors to help with the development and capital expenditure of the business. This would mean giving away shares in return for finances from investors for capital expenditure such as facilities developments. Providing equity is a source of finance that benefits the school in the sense that they will not have to make any loan payments or provide any interest fees. This will allow the school to access immediate funds for capital expenditure purposes. However, giving out equity means that less profit can be made in the future due to distributing shares and equity of the business. This leaves less a potentially lower budget for future capital expenditure due to smaller profit share. Long Term Bank Loan - This method is for the management of Kellett school to approach banks in hopes of obtaining a bank loan to pay back over a long period of time. This means the school can receive funds and attend to the necessary school developments through utilising the funds obtained from the bank. This also means that the school do not need to give away any shares, and as a result, any future profits. However this could be risky for the school. As interest remittences could vary year-on-year, long term loans could cost them a large sum of money year-on-year. 4