Finance, cash flow and insolvency

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Kishan Hirani


Kishan Hirani

Unit 7

Finance, cash flow and insolvency

Finance, cash flow and insolvency

To:        Head of Finance Department

From:        Kishan Hirani        

Date:          31/03/2008

Re:        Sources of Finance

Task1 (P1)

An additional need of finance is always required by the business to expand. In this case my client intends to set up a business as a hairdresser. Operating from a small hairdressing salon in south Woodford, as he intends to establish the business as a sole trader and convert to a partnership In the near future, therefore he will need the help of additional finance to be successful.


However the amount of finance available to my client to trade as a sole trader and then as a partnership is limited, however there is still a range of options from which he can make a decision. Some of the options available to him include.


        Trade Credit         Sale of Assets         


Personal Capital         Hire Purchase/Lease

  Bank Loan                    Retained Profit

Credit Cards                         Bank Overdraft

               Borrow money from                                             Mortgage


Personal capital:

He can use his saving to start off as a sole trader; this is his own personal savings.

Trade credit:

This is a good way as requesting credit from suppliers is a good way of helping cash flow situation, however trade credit is not a method of financing expansion of a company. This method of agreeing trade credit can help my client to pay its creditors some time after the goods are delivered. However to obtain ‘credit’, he will need to build up a good credit history by paying suppliers on time and keeping up

Payments on loans and credit cards. His bank will often be approached by companies for references; thereafter a number of months proving credit-worthiness a sole trader or partnerships business is eligible for trade credit. Therefore basically this is time given by other companies to pay bills e.g. gas bill.

Sale of assets:

My Client can sell his own personal assets or when he converts from a sole trader to a partnership business, he can sell some of the assets he does not need when he was trading as a sole trader. Assets which have been purchased previously in this case it will be equipment for hair can be sold to raise money for the company; however he must be sure that he does not need these assets.  

Hire purchase/lease

Hire purchase and leasing is similar, here he can choose an asset that he needs for his business and then agree to make regular payment for a fixed period to a hire purchase company in exchange for the right to use that asset. The repayment amount will not change as it’s a fixed amount, however the assets remains the property of the hire purchase company until the final payment is made and at that point ownership  of the asset transfers to you, and you are then free to continue to use or sell the asset.

Bank loan:

My client can borrow money from the bank at an interest rate. However banks are reluctant to lend money to sole traders as sole trader business has limited liability.

Retained profit:

This can be used by my client, when he converts from a sole trader to a partnership business. All the profit he made, when he was trading as a sole trader can be used for expansion.

Bank overdraft:

He can agree an overdraft limited with the bank, so he can spend a bit more then he has in the bank.

Credit cards:

My client could apply for a business credit card, this card works just like a personal credit card. Credit cards are used to pay for items and a statement is sent monthly, including transactions and repayments that have taken place in the previous month.

Borrow money from friend or family:

He can borrow money from a friend or a family member, they could agree an interest rate or as its friends and family they may not charge interest.


He can take out a mortgage on the premises he plans to operate on.  


There are many different sources of short term, medium term and long term finance available to companies and respectively when converting from a sole trader to Partnership. When the sole trader is used in connection with a business, it describes the status and legal ownership of the enterprise. It simply means that the firm is owned by one person, who is self employed, he or she conducts the business on his or her own behalf and not in conjunction with anyone else.

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A serious disadvantage of operating as a sole trader is that while the proprietor keeps all the profits generated by the business, he or she also has to accept unlimited liability with regard to any losses and in the event of the business becoming insolvent, must bear the loss personally. As a result forming a partnership is one possible, solution to overcome some of the disadvantages associated with running a business as a sole trader, the main one being that it is much easier to raise Finance. Once you   start to trade as a partnership business, banks will ...

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