Hire Purchase, involves the whole capital value of the vehicle (VAT included) being paid off plus interest over the chosen terms of the contract. It therefore delivers a fixed amount of equal and unchanging payments and then Owensport will own the vehicle. Hire Purchase gives some cash flow advantages over outright purchase, but not to the extent of contract hire, lease purchase.
Advantages
- Fixed term and fixed equal, unchanging payments
- Assets is owned by user at the end of the contract
- Cash flow advantage over Outright purchase
- Taxation advantage on high value vehicles over Contract Hire and Lease Purchase.
Disadvantages
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Once you have entered into this agreement it is hard to escape the payments if you no longer require the asset.
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High deposits are generally used.
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This is classed as a debt on your balance sheet, which could make it difficult for future borrowing.
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Can be more expensive due to VAT changes.
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Deprecation charges are yours.
Leasing
If a company leases am equipment they, are not the owner of it although the company be able to buy it at the end of the lease. The company that organise the lease is the original owner. The main advantage of leasing is that they is no capital spend, so it can be a big help to cash flow.
The company will not claim a full capital allowance for the equipment the company initial owner claim the allowance. But all the payments the company makes is treated as an expense so the company will get a full tax relief on it. There are different sorts of leasing. A ‘Close End’ which is a fix period between one to five years. At the end of the agreed period, there may be an choice to buy on or take on a further lease for a standard rent An ‘Opened Ended’ is ending the contract at any time after the expiry of an agreed minimum period.
Advantages
- Affordable monthly payments -Monthly lease payments are less than monthly purchase payments or monthly depreciation plus interest expense.
- Flexibility - Payments can be matched to budgetary levels. The business conditions - cash flow, equipment needs and tax situation, help define the terms of your lease.
- Risk - The equipment can be returned at the end of the lease without regard for its book value or the expense of proper disposal.
Disadvantage
- No equity/ownership in the vehicle or asset.
- The potential early stop liability.
The type of assets Leasing is more appropriate for a new business, are Premise, machinery, and office equipment. I say this because if a company do not have enough start up capital, to buy to purchase all of the production machinery, the premise and the equipment the business be so much in debt that it wouldn’t be able to break-even and get bankrupt. If the company got it out on leased it would have a good chance of breaking-even, and it will also be able to purchase the assets at the end of the contract. I think that assets such as office equipment, machinery, vehicle should be brought on a open end contracted which makes it easy to purchase the asset, and the premise should be brought under a close end contact.
Contract Hire
Contract hire this is a form of leasing, mostly used use for financing a fleet of asset, in this case what is in the contract is not a specific asset or assets, but use of a agreed numbered of the specified typed. The length of the agreement is usually shorter than the estimate life of the equipment. Use if the equipment can be provided with or without the maintenance you will be able to arrange to but the asset at he end of the agreement.
Advantages
- Monthly outgoing with no difficult capital expenditure.
- Fixed monthly rental for accurate budgeting and improved cash flow.
- Minimum initial expenditure, normally three months in advance.
- No capital tied up in a depreciating asset and no residual value risks on the vehicles or asset.
Disadvantage
- Fixed Interest Rates-Interest rates are usually fixed throughout the contract which may prove a disadvantage,
- It is costly to early finish the agreement.
Recommendation
Leasing in a substitute to buy capital assets, buying machinery can be very expensive. Particularly to a new business. Leasing can offer Owensport to avoid the initial expenditure. So it can be a significant help towards Owensport cash flow, so I recommend owensport to purchase his assets by lease. I also recommend owensport to purchase the premise by a close end lease, so that owensport overhead will be lower, this will help the company to break-even.
Working Capital
As Owensport is a new business, he may need to borrow money to cover his day-to-day expenses until he makes a profit There are different sources of borrowing when starting or growing a business. I’m going to look at the advantages and disadvantages of loans and overdrafts- two of the most popular sources funding working capital, and I will also talk about the other type of sources funding capitals which is selling shares etc. Working capital is important because it pays off the business day-to-day expense (e.g. paying for the stocks, wages, bills etc); the source of working capital is current assets. A current asset is a short-term asset, which a company uses to generate cash. But there also is a current liability, which a company has to be taken to account how much working capital the company has at its disposal.
To find out the working capital the following equation must be done.
WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES
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STOCK + DEBTORS + CASH
Working capital is the same as net current asset and its is imporant to the company balance sheet. It is important to many business to have working capital to meet the company ask. Many compaines have gone under because they have not found enough working capital. The managemnet of the working capital is called the working capital cycle. A working capital cycle chow cash following through differnet stages of business. Some part of of this cycle may take longer than others, and the amount of the working capital will depend on the timing in the business.
Loan
A loan is an amount of money a company borrow for a set period and with an agreed repayment schedule. The repayment amount will depend on the loan size and the interest rate.
Loans are generally most suitable for paying for assets, like gym equipment, for -up capital and for other cases where the amount of money you need is not start going to change. The terms and price of loans vary by provider and are usually negotiable.
Advantages
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The company is guaranteed the money for a certain period, generally three to five years - unless you breach the loan conditions.
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Loans can be tied to the lifetime of the equipment or other asset the company borrowing the money to pay for.
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The company will know what the repayments are and can budget accordingly.
- The comapny be able to negotiate a repayment holiday, meaning that you only pay interest for a certain amount of time whilst repayments on the capital are frozen.
Disadvantages
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Most loans have strict terms and conditions.
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They're not very flexible - could be paying interest on funds you're not using.
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The comapny could have trouble making monthly repayments if the customers don't pay promptly, causing cashflow problems.
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Lenders will need to be convinced if the company can repay them, or at least that you can offer some sort of security.
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In some cases loans are secured against the assets of the business or your personal possessions, including your home. The interest rate for secured loans is therefore lower than for unsecured loans.
It is not a good idea to take out a loan for ongoing expenses. Expenses are best funded from the cash received from sales, possibly with an overdraft as a backup.
Overdraf
An overdraft is a borrowing facility attached to the companies bank account, set at an agreed limit. It can be drawn upon at any time and is ideal for your day-to-day expenses, particularly to see you through cashflow problems. However, it can be an expensive way to borrow long-term, as the interest rate tends to be higher than that of a loan.
Advantages
- An overdraft is flexible – a company only borrow what you need at the time.
- You don't need to put up much security.
- You only pay for the funds you use.
- It's quick to arrange.
Disadvantages
- It has to be rearranged regularly. An arrangement fee is usually payable when credit is extended.
- It can be called in by the lender at any time.
- You face penalty fees if you exceed the agreed limit.
- Overdrafts are usually secured against business assets - the lender can seize these if you don't repay the overdraft.
- Unlike loans a company can only get an overdraft from your existing bank. In order to get an overdraft elsewhere the company will need to transfer the business bank account.
A company should note that what starts out as a good deal may change, and so may abusiness needs. It's worth reviewing the options regularly.
Selling Shares
The only way a company can sell shares is by forming a limited company, then be willing to sell some of its shares in return for some inverstment in the business. Is a company does this it will mean that it will lose some of its potental gain the company might get. As this happenes the shares will increse in value as the profit of the business grows.
Ordinary Shares
Ordinary shares carry the residual economic value of a company. They carry rights to sharing of profits through dividends, to the extra assets of a company and to votes at annul general meetings of the company.
Preference Share
Preference shares are entitled to a fixed dividend and rank ahead of ordinary shares in their call on assets if a company goes under. They do tend towards a higher dividend yield, and sometimes have different voting rights. However they are slower than ordinary shares to benefit from price rises when a company is doing well.
Dividends
Dividends are share of the company’s profit each year. As this is the same as many type of share investment. If the organisation fails all it ordinary shareholders it may find that they lose all the money invested in the organisation.
Deferred Share
A deferred share is the same as ordinary share but they receive dividends in certain condition, such as a specific level of profit, or on a particular data. The conditions of the deferred share sometimes require that dividends be paid only after a certain amount of paid out to ordinary shareholders.
Right issue
Rights Issues are a way for companies to raise money by giving existing shareholders a right to buy shares in the company in amount to their existing shareholdings. It is common for new shares to be issued in a rights issue at a discount to the current price at the time the Offer is made.
Debentures
Debentures are not type of shares, Debentures are loans that are usually secured and are either fixed or floating charges with them. Debentures are often secured on the assets of the company. The only way a debenture stock can be issued if the stock is a PLC. Debenture holders have the right to receive their interest payments ahead of any dividend is payable to shareholders and, most essentially, even if a company makes a loss, it still has to pay its interest charges.
Debt Factoring
A debt factoring are company which allows other companies to raise finance based on the value of the companies outstanding invoices. Debt Factoring also gives the company the chance to outsource the sales ledger operations and to use more complicated credit rating systems. Once the company has set up a factoring arrangement with a debt Factor. The debt factor works by having factor fully controlling the companies’ sales ledger and provides the company with credit control and collection services of all its outstanding debts. The invoices the company issued ahead sales are sent to the factor that normally advances up to 80 to 90% of the invoice amount to the company. The balance, less charge, is paid when the customer makes payment directly to the factor. The service is disclosed to the companies’ customer who usually receives a letter from the factor, or attached note to the companies invoice, containing payment instructions to the factor.
Government assistance
There government try to give assistance to business, which cannot get any help from anywhere else. For new business there are a number of grants and schemes available to help businesses.
Grants
A grant is where an organisation or authority gives a sum of money to a business to help it to succeed in a particular plans. Grants are given out by the government at a local and national level, as well as by other smaller charities, such as The Princes Trust.
The main reason of a grant is that the money is not repayable; companies pay no interest on the amount given. However, it is not free money, the company will need to carry out a vital amount of hard work to logically have a chance of obtaining a grant. As the money is not repayable, the number of grants is restricted, and rivalry for them can be quite strong in some areas.
Small Firms Loan
The hardest part of obtaining finance for small businesses is having a sufficient amount security. The small firms loan guarantee is run by the Small Business Service, and provides additional security by guaranteeing 75% of a loan for businesses that have a sure business model. This means that the government guarantees three quarters of business loan in the event that companies cannot pay.
Recommendation
I recmmend Owensport should get an overdraft approved to help it pay for its working capital, as owensport will only get 25% of the money owed and the rest the follwing month. I also remend owensport to get a loan to help it to brak-even as the company. As owensport is a sole trader it wont have any shares to sell to gain capital in the company, so this is n’t relavent. If owensports has bad debts he can use debt factoring helping him to break even.
PLC
A public limited company is owned by shareholders, run by directors and set up as a body separate from its owners (shareholders). The advantages of being a Plc are:
- You get to raise more capital by floating on the Stock Market
- Sell the shares of the business to members of the public
- There is limited liability to the owners, if the business goes ‘bust’ – if the business can longer operate in the fierce market or are facing financial ruin then the owners are protected by limited liability, they only stand to lose the amount they have invested in the company.
- Sale of shares allows larger sums of money to be raised
- Whilst the money has money permanently, the owners, the individual owners can recoup their money by selling their shares to other people
- Directors can be bought in as experts in certain fields
However being a Public Limited Company, there are a few disadvantages, which can affect the further success of the company. These are:
- To become and trade as a Plc you must have a share capital of at least £50,000.
- Low profits may mean low bonuses or dividends for employees/shareholders
- There are a number of legal requirements to fulfil when setting up a PLC
- Regulations mean that it is more expensive to set up than a sole trader or a partnership
- Accounting records of Plc’s are less private than those of other organisations. Companies are governed by the Companies Act 1985 which states that financial records must be audited and made available to the Registrar at the Companies House
- Directors need to report back to shareholders at the AGM (Annual General Meeting) where unpopular decisions and poor results must be explained.
- If the company is operating well, financially, then they are likely to face a take over from bigger competitors.
From the above advantages and disadvantages you can see that they both weigh out to be the same on both sides, how ever there are probably more advantages than disadvantages, or there are more disadvantages than advantages.
