I need to research sources of finance. The reason for this is so that I will be able to recommend the appropriate source/s of finance, which will benefit Happy Hols Ltd to its maximum. I will write this in a report format.

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Task 7- Sources of finance

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* I need to research sources of finance. The reason for this is so that I will be able to recommend the appropriate source/s of finance, which will benefit Happy Hols Ltd to its maximum. I will write this in a report format. This is a task in itself and so is important. I will get this from textbooks and from my teacher's knowledge and notes.

Happy Hols Ltd want to invest in the extension of camping holidays, but it needs a source of finance, which will enable it to do so. I will investigate the main sources of finance and recommend the most appropriate one/s for Happy Hols Ltd.

There are many sources of finance, which would all provide the business with a quick source of money, which will have to be paid back. But the amount the company needs can limit them to a range of sources of finance and methods of repayment e.g. interest. The sources of finance can be split up into three types; long term, medium term and short term. Long term finance is mainly for companies who need a large sum of money, which would be difficult to be paid back, this would be used to provide start-up capital to finance the business for its whole lifespan, finance the purchase of assets with a longer life, such as buildings and provide expansion capital for large projects, such as building a new factory or taking over another business. The repayment as it is so much would be paid over a number of years rather than straight away. Medium term finance is again for high sums of money needed but not as high as long term, these usually would be used to finance the purchase of assets with a two to five year life, such as vehicles and computers, to replace an overdraft which is difficult to clear and is proving expensive and to finance a change in strategy, such as to switch marketing focus from Britain to the whole of Europe etc. But the repayment would be faster than long term, such as in a couple of years etc. Short-term finance is when a company needs money quickly for immediate things, which are temporary; the repayments are much quicker than the others. They would be used to bridge temporary finance gaps, to get through periods when cash flow is poor and to cover temporary needs for extra funds due to unexpected problems or opportunities.

As Happy Hols Ltd wants to invest into a potentially expensive extension, the possibility of using a short-term source of finance would be ruled out due to the size of the plan. This would not be sufficient enough to cover its costs, as the source would not be as large and require quick repayments, which would not be possible. The types of short-term finance would be a bank overdraft, trade credit and debt factoring. Also some sources of medium term finance would not apply, as it would not add up to the costs of the extension such as leasing and hire purchase.

Possible sources of finance

I will now explain the possible sources of finance, which Happy Hols Ltd could use:

Medium term finance

Bank term loan - This is possibly the simplest form of loans available to businesses. The average bank manager dealing with a medium sized firm and responsible to head office for the performance of the branch uses a set of well-defined criteria when making a loan. A bank loan is for a fixed amount at a fixed rate of interest. There is likely to be a demand for regular payments.

The advantages of a bank term loan is that financial planning is made easier as repayments are made in regular instalments and the interest rate are often fixed, but the disadvantages are the smaller the business the higher rates paid due to presenting a higher risk of things going wrong.

Long term Finance

Sale of Shares - This is the issuing of shares of the business to other investors who want to buy into the company.

The main advantage of issuing shares is that the shareholders have limited liability if the business fails. Personal possessions are not at risk and their liability is limited to the actual capital invested. Also the capital is raised by issuing shares (which are a proportion of what the company is worth) to investors, who are encouraged to buy by the promise of receiving dividends or profits on their shares. Also shares can be sold as preference shares which offer a fixed return as profits change from year to year, according to how well the company has done.
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The disadvantages of selling shares are the administrative costs of issuing shares are high. Also it is difficult to estimate the market price of shares, though this problem can be avoided if tender issues them, where investors state how much they are willing to pay for them. Also the price of the shares can go up or down and shareholders may have to sell at a lower price than they bought it. Also the shares of an Ltd will have to be sold privately, which would costs money and investors might not want to invest due to the ...

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