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.
Task 7- Sources of finance
Plan
* 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.
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 ...
This is a preview of the whole essay
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 lack of hassle from buying into a Plc.
Reinvested Profits - This is the money that the business makes being re-invested into the business to aid its plans.
The advantage of this is capital can be raised by the company reinvesting or ploughing back the profits made at the end of the year, after expenses and dividends to shareholders have been paid.
The disadvantage of this is profits may be scare or non-existent, especially in times of recession.
Mortgage Loans - This is a loan where the lender insists on some asset of the business being tied to the repayment of the loan. In the event of bankruptcy or liquidation that lender will then have priority on the money from the sale of that asset for the repayment of the loan. The asset is always land or property.
The advantage of this is capital is often supplied by pension or insurance funds for a loan over 25 - 30 years for buildings or land, with the asset as security.
The disadvantage of this the loans are usually only given when large sums are required.
Venture Capital Loans - Venture capital is risk capital, usually in the forms of loan and shares as a package, to provide a significant investment in a medium or large business.
The advantages of this are capital is supplied by venture capital firms who accept a certain degree of risk being inevitable. Also most venture capitalists also provide help in the form of back up management and financial expertise. Also the governments Enterprise Investment Scheme offers incentives to private investors willing to invest in unquoted companies.
The disadvantages are that most venture capitalists are only interested in loans for more than £50000 and some only consider ventures where more than £250000 is involved, as the administration costs are not worthwhile on smaller projects. Also they charge a negotiation fee for arranging the finance and they generally expect a non - controlling equity stake of 20 - 40% in the firm's capital, as a return of their investment.
Debenture Loans - A debenture is a long-term loan, which does not have to be repaid until an agreed date. Debenture holders are entitled to a fixed rate of the return year and have priority over all the shareholders.
The advantage of this is that individuals can supply capital to a company in the form of a long-term loan called debentures, which have to be repaid on an agreed date. These payments take priority over payments to all other shareholders.
The disadvantage is that the company has to offer some security for the loan, which can be sold if the company cannot meet the payments. In the case of a fixed debenture this is a specific asset such as a building or land.
(Source - Advantages/Disadvantages - Understanding Industry by Ian Marcousé pg 85-86, Definitions - Business Studies Pg 297 - 301 - Susan Hammond & A-Z Business Studies pg 148, 167 - David Lines, Ian Marcousé & Barry Martin)
From the different sources of finance I have investigated above I will now explain what the findings mean in relation to Happy Hols Ltd Ltd. Happy Hols Ltd needs a source of finance for them to have an extension which involves camping holidays. Happy Hols Ltd have many options to what kind of extension they require. This can be that they want to own a camping site which is registered to them which would involve them buying the land etc, or they could set up a joint venture which would involve them paying an existing camping site company to set it up for their customers, but in the process paying the camping site commission from its profits. Of course both types of extension would require totally different amounts of capital and both have their advantages and disadvantages. But both act as an extension and I will select the possible but appropriate sources of finance for both plans of extension of camping holidays.
If Happy Hols Ltd wanted to invest in camping holidays but wanted to extend that they had a joint venture, which is when two or more firms set up a business division that will be operated jointly, then the possible sources of finance would be a bank term loan, though sale of shares is possible or re-invested profits or even debenture loans. The reason for a bank term loan because Happy Hols Ltd would not need so much money if they were to set up a joint venture with another company. They would just have to pay the company money to use the campsite or the land, to build the appropriate structures and to get staff to be employed unless the camping site company is able to provide it. The bank loan will just be enough to cover these costs (including paying the campsite to use the area and facilities) and from then they will have to give part of the profits to the campsite owners as commission. Then with the remaining profits pay the bank loan off and then re-invest the remaining surplus money into the business. Though this is a good idea, as Happy Hols Ltd is a small company they will have to pay higher rates of interest on the repayments.
Happy Hols Ltd could also use sale of shares to gain the finance to invest in the extension of camping holidays. First of all they would have to put the amount of shares that would have enough value for them to pay the campsite owners and to pay for the additional costs, then they would be able to get the campsite up and running. With the profits they will be able to pay the commission to the owners and keep the rest to re-invest. Though this again is a good idea (especially to the person/s who buy the shares), the administrative costs are high, prices of the shares can be difficult to value, and you might end up selling more shares one time for a certain value but another time a smaller amount of shares might cost the same value.
Another way Happy Hols Ltd could invest in camping holidays is through re-investing its profits into paying the campsite owners to use the area. Then from the profits they can pay the commission to the owners, and keep the rest. This is a fairly good idea if Happy Hols Ltd makes a lot of profit as they will not have to do anything else e.g. sell anything to gain the finance, but just carry on maximising profits. But if they do not make much or any profits it would take an extremely long time for them to get the required capital.
From the sources of finance mentioned above, all these allow Happy Hols Ltd to pay the campsite owners the money to use the campsite, make a profit, pay the commission and pay any debts. But this all depends on how successful the business is in its business venture.
Instead of having a joint venture Happy Hols Ltd could invest in camping holidays by setting up their own campsite individually, and so naming it through their own name. If Happy Hols Ltd was to do this then they would need totally different types of finance to those possibly used in a joint venture. They would need sources finance, which would give much higher capital, as more money would be needed. The possible source of financing could be Debenture loans though venture capital loans and mortgage loans could be possible as well. The reason for debenture loans is due to the fact that Happy Hols Ltd will need a lot of money to set up their own camping holiday business, this means that they would have to buy the land which could be in another country where prices could be higher, complete the construction such as the buildings, employ a work force etc. They will have to do a considerable amount, which will involve quite a fair bit of money. As debenture loans can be quite high, Happy Hols Ltd can borrow enough that would be able to cover all these costs. Once they have set it up they can use the profits they might make, to pay the lender their due repayment on the agreed date. Though debenture loans are good for the development, something has to be offered an s security, this probably will have to be the land they have bought.
Venture capital loans could be used as well as again they will lend large sums of money to businesses and to set up your own campsite would cost a lot. They will provide the money, which then Happy Hols Ltd can buy the land with and carry out what it needs to make it a successful business. But as part of the loan Happy Hols Ltd would have to give some shares to the venture capitalist, which would have a stake in the company. Also venture capitalists charge a fee, which could costs, a lot of money. With the money the business makes as surplus, they would be able to pay off the venture capitalist but they would still loose shares.
Mortgage loans could also be used as a source of finance, as they give large sums of money as loans and have like with mortgages a long-term repayment system. Happy Hols Ltd would be able to get the money they need to buy the land and to set the campsite up, but then with the profits they would have to just give a small percentage of the money to pay the mortgage repayments. Though this is a good idea the asset that would be the land and everything on it would be the security, and so they could loose it.
The information was relevant and useful, as I needed to advise Happy Hols Ltd on appropriate sources of finance. They need a source of finance so that they can invest in the extension of camping holidays, and so they will need to know what would be the right sources of finance, that would benefit them most. This would lead to them making a big return on the investment and so the project would be successful, but this can only happen if the correct source of finance is recommended. This is what I have to find and explain. If the wrong one is used this can lead to the company going into debt or not being able to complete their plans. Selecting the right source of finance would help the company achieve their plans; this would also allow the company to grow. But also if the company's plans are successful due to the source of finance, this would allow them to make a good profit, that they would be able to re-invest into the business to try and improve it.
The information is valid, as it has come from Business Studies books and other resources, which have been written by experts who have vast knowledge in the subject. Also the teacher knowledge is an expert source and none of the resources are wrong. It does not help a lot, as the sources of finance have not been recommended specifically to the best form of investment e.g. bank loans when buying new equipment etc. Also all the sources and resources are up to date and are totally relevant to the subject.
Recommendations
Happy Hols Ltd has two choices in investing into the expansion of its camping holidays, either it can go into a joint venture with an existing campsite company or start its own campsite. In both cases the required source of finance is needed but it must be the right one, for that the company is able to afford their extension at the time and promote it so that it will become successful. This could be done through the existing travel agent branches. With the profits the company would be able to pay anything it owes either as debts or as commission and still have enough for the business and shareholders.
I have decided on what source of finance that would be appropriate for each type of extension and I will also recommend which would be the best idea, in terms of the business. Firstly if Happy Hols Ltd wanted to invest in camping holidays through a joint venture, the best form of finance would a bank loan. The reason for this is because Happy Hols Ltd would not need very much to finance the joint venture, they would just have to pay the camping site company to use their site and then from there pay them commission. This is not very much and so a bank loan would be sufficient enough for the sum needed. With the profits that the company makes it would pay the commission to the campsite owners and with the remaining profits pay the bank loan off. I could see that a loan is paid in easy instalments, which makes financial planning easier. And as the rate is fixed, the company knows how much it will pay on top of the repayment without it going up. The are not many drawbacks to this option, as when compared to other financial sources I considered. The sale of shares was not as a good idea as the loan as I could see it had very high administrative costs. Also I could see that it is difficult for shares to be valued and also due to the fluctuation of the prices, the company could be issuing too many shares when it could sell less for the same value. But with a bank loan, the control of the company is not diluted as with the selling of shares. Also I could see that a loan would be better than re-invested profits as I could see that there was no guaranteed way that the company would make a profit. If the company wanted to use this method could have taken a long and slow time for the company to be able to save enough capital for the venture, that is only of the company was to make a profit. From these two's drawbacks I can see that the bank loan is the easiest, quickest and most effective source of finance for the company to have a joint venture.
But if the company decided that they wanted to actually own their own campsite for their camping holidays, which would be an advantage as they would be able to do anything, within the legal boundaries, then they would need a much higher amount as capital then in a joint venture, and therefore need a different source of finance. The best source of finance for this is a debenture loan. The reason why a debenture loan would be the best source of finance is because a debenture loan can be a large sum of money, which would cover the costs of buying and setting up a campsite. Also as it is a large amount of money, the company would not be able to pay it back straight away but with a debenture loan it is long term, meaning that the repayments are split into affordable repayments and are to be repaid on agreed dates. This could work to the company's advantage as they could make the repayment dates nearer to where they can predict they will make profits. The only downside with it is that security has to be paid up, though there is not an expensive negotiation fee or are shares given to the lender as an equity stake, as with Venture capitalists. Also the repayments can be flexible so the can be quicker or slower to be repaid, but if the company want to get the loan paid as soon as they can, it is possible rather than the company having to keep the repayments for a very long period of time such as a mortgage.
As you can see I have decided on sources of finance for both ways of investigating in camping holidays from which I done through the investigating and analysing of the possible sources of finance. But both will have their downsides, and so I will use the knowledge I gained from the sources of finance to recommend the best way of investing in the extension of camping holidays. I have chosen to start a joint venture with an existing camping site or camping holiday company. The main reasons for this is because it would be cheaper in paying back the repayments and that if the company want to one day change their plans, that they do not want to concentrate on camping as much any more they could get out of the venture quicker than with the other possible investment. The reason for this is that the company would have to sell the land, but would have to get a buyer first and if they cannot get one fast enough they might loose money e.g. camping not popular to customers anymore. This way of investing does have its strong points over the over such as there would be no disagreements between the two companies, but the repayments of the loan would be much harder to cope with if the plan failed.
I researched this through textbooks, my own knowledge and the teacher's note. The strengths of it are that is very detailed, the weaknesses are that it is very long and not very concise. I would improve it by making it more concise.