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Different sources of Finance for Businesses

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Introduction

Different sources of Finance for Businesses Introduction This assignment will look at the different sources of finance that are available to a small business or a big company. With each source of finance listed the report will assess the implications that can arise and along with this the report will look at the cost to the business to taking a curtain source of finance. All businesses need short-term finance from the very beginning to start up the business and to cover day-to-day running costs. This provides the business with working capital. However businesses also need long-term capital to help them to grow and expand, and this is paid back over a number of years. Without finance a business would find it difficult to accomplish anything, for example someone who decided to start up a shop would need finance at first to just buy the shop and the stock. Even a window cleaner would need finance to buy equipment such as ladders and buckets. But this can be taken onto a larger scale, as all businesses need finance at some point. Different sources of finance The report will now list the different sources of finance available, starting with sources available to small and new businesses to sources only obtainable to big companies. External Sources of Finance This source of finance comes from outside the business and involves the business owing money to an outside individual(s) or companies. Personal Savings This mainly applies to sole traders, partnerships and small private companies. Owners may use some of their own money as capital to invest in the business. Usually this option is used by the person(s) who will be running the business as it is a cheaper option than trying to get a loan from the bank. The downside being that if the business does not succeed then the person(s) will loose everything. This is considered an external source as it is assumed that the money lent to the business will eventually be paid back to the private individual, sometimes with an extra amount to compensate the individual for the loan of the capital. ...read more.

Middle

Deferred ordinary shares These are a form of ordinary shares, which are entitled to a dividend. A dividend is paid through the profits the company has made over the financial year. Usually the dividend is split into two payments over the following financial year. Ordinary shareholders can help the business by funding the company through: * The purchase of new shares * Receiving less dividend, which allows more profit to be reinvested into the business. By retaining more of the company's year end profits, which would have usually been paid out in dividend to share holders, it can be used as a source of extra investment for the business. Although this method may not provide enough funds it can help the business out if the companies cash flow does not start well they will still be able to pay any suppliers on time. Through the issue of new shares (dependant on the amount raised) the company could use the extra capital gained to expand the business through the acquisition of development land, property or buying out another company such as Tesco purchasing the 'One Stop' corner shop chain. New shares issues A new share issue may be undertaken by a company for the following reasons: * An unquoted company wishing to obtain a Stock Exchange quotation * An unquoted company wishing to issue new shares, but without obtaining a Stock Exchange quotation. * A company which is already listed on the Stock Exchange wishing to issue additional new shares. The methods by which an unquoted company can obtain a quotation on the stock market are: An offer for sale - An offer for sale is a means of selling the shares of a company to the public. An unquoted company may issue shares to raise cash for the company. All the shares in the company, not just the new ones, would then become marketable. ...read more.

Conclusion

Although, there is also the prospect of very high returns on the initial investment. A venture capitalist will require a high expected rate of return on investments, to compensate for the high risk. A venture capital organisation will not want to retain its investment in a business indefinitely, and when it considers putting money into a business venture, it will also consider its "exit", that is, how it will be able to pull out of the business eventually (after five to seven years, say) and realise its profits. Examples of venture capital organisations are: Merchant Bank of Central Africa Ltd and Anglo American Corporation Services Ltd. When a company's directors look for help from a venture capital institution, they must recognise that: * The institution will want a stake in the company, but purely so it can have a share of the companies profits and will act as a silent partner. * It will need convincing that the company can be successful. * It may want to have a representative appointed to the company's board, to look after its interests. A venture capital organisation will only give funds to a company that it believes can succeed, and before it will make any definite offer, it will want from the company management: * A business plan * Details of how much finance is needed and how it will be used * The most recent trading figures of the company, a balance sheet, a cash flow forecast and a profit forecast * Details of the management team, with evidence of a wide range of management skills * Details of major shareholders * Details of the company's current banking arrangements and any other sources of finance * Any sales literature or publicity material that the company has issued. A high percentage of requests for venture capital are rejected on an initial screening. Thus only a small percentage of all requests survive both this screening and further investigation and result in actual investments. Recent successes in this area if financing include the internet search engine 'Google'. ?? ?? ?? ?? James Pitcher 04/05/2007 Finance2.doc P1 ...read more.

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