financing growth chapter 15 pages 80-83. aims for today to identify ways of financing a business...

Financing Growth

Chapter 15

Pages 80-83

To understand how to finance a business from Internal & external sources

Aims for today

• To identify ways of financing a business from Internal & external sources.

• To be able to recommend and justify the most appropriate source of finance to fund the growth of different businesses.


Growing a business


Why might a firm want to grow larger?

• Make a list or mind map of the reasons why a firm may want to grow larger.


Why do firms want to grow?


How can firms grow?

The type of integration that firms use will depend on their situation. There are 3 ways it can be done:

Internal Expansion – Expand by opening more outlets or employing more staff

Mergers – Two businesses joining together to form a new or larger company

Takeovers – Where one business buys at least 15% of another business to control it


Financing Growth

Getting bigger requires investment. This can come from 2 main sources:


Sources of finance

Internal • Personal savings• Retained profit• Working capital• Sale of assets

External • Ordinary shares• Debentures (secured

loans) & other loans• Overdrafts• Hire purchase• Trade Credit• Grants• Venture capital


Task 1: In pairs

C grade: Summarise the Internal and external finance options that a business may have.

B grade: Explain the advantages and disadvantages of each method.

A grade: Recommend and justify the most suitable method for a small bakery, a LTD and a franchise.


Internal Sources of finance


1. Retained profit

When a business makes a profit and keeps it rather than spending it, it is called:

RETAINED PROFIT

The retained profit is available to use within the business, for developing the business or for a ‘rainy day’.


2. Selling assets

When a business sells off fixed and current assets which it no longer needs in order to raise

finance for new projects.

Fixed assets -buildings, land & equipment.Current assets - cash, stock & money owed.


3. Owners Capital or savings

When the owner uses his or her ownsavings to invest in the business. Usually

a sole trader will part finance a new business with their own savings.


External Sources of finance


1. Share capital

- The monetary value of a company -Shareholders invest in a company (they have

part ownership of it).

An entrepreneur may use their personal savings (e.g. £5,000) as their share and they

get others to invest as well.

Only Public Limited Companies (PLC’s) can sell shares on the stock market.


2. Venture Capitalists

A person or company who buys shares in a business that they hope will grow fast. In the long term, they will sell the shares at a profit

and often reinvest in other companies.


3. Loans

An amount of money is borrowed fromthe bank and then repaid with interest

over a set period of time. The loan periodcan range from 1 year to 10 years. Look

for the APR amount – the higher theAPR the more interest is paid.


4. Grants

•Some businesses may get grants to help them start up (especially small businesses).

•Organisation such as the Princes Trust give business start up grants to young people up to the age of 30.

•Grants are also available from the government and the European Union.

•Grants DO NOT have to be repaid


5. Bank overdrafts

• An overdraft facility is where you can use more money than you actually have in an account. An overdraft of £2,000 would let you go £2000 ‘in the red’ which may help a business in the short term.

• Personal overdrafts tend to be between £100-£1000.


6. Trade credit

• TRADE CREDIT is when a supplier allows you a period of time (such as 30 days) to pay for goods and services.

• However, your customers may also expect TRADE CREDIT so the advantages of this can be cancelled out!


7. Factoring

Is where a business is able to receive cash immediately for the invoices it has issued from

a FACTOR such as a bank (instead of waiting the typical 30 days to be paid)

A FACTOR is a financial service company like a bank and they charge a fee for this service.


Page 8 Mini book


Task 2: Role play

You are a small business advice officer in a bank. Your client, Sam runs a successful mobile hairdressing business which he hopes to expand nationally within the next 3 years.

Explain the advantages & disadvantages of different types of finance for Sam’s business and make some recommendations to him.

Ext: Explain issues with the availability of finance (pg82) and then select the most suitable source for his firm. What issues does he need to consider when using the chosen method of finance?

Task 3: Finance matching activityRetained profit

Shareholders

Personal savings

Share

Short term finance

Long term finance

Leasing

Loans

Grants

Profit that is kept and usually reinvested in the business

Part ownership in a business

Money that is borrowed or invested for more than 1 year

Money that the business has to repay quickly like an overdraft

Renting of premises or equipment

Money that a person has kept aside

Money that does not have to be repaid. Often from the Government or EU

A sum of money that has to be repaid with interest over a certain period.

The owners of a company

Where a business is able to receive cash in advance for the invoices it has issued.

Factoring


SolutionsRetained profit

Shareholders

Personal savings

Share

Short term finance

Long term finance

Leasing

Loans

Grants

Profit that is kept and usually reinvested in the business

Part ownership in a business

Money that is borrowed or invested for more than 1 year

Money that the business has to repay quickly like an overdraft

Renting of premises or equipment

Money that a person has kept aside

Money that does not have to be repaid. Often from the Government or EU

A sum of money that has to be repaid with interest over a certain period.

The owners of a company

Where a business is able to receive cash in advance for the invoices it has issued.Factoring


Task

• Complete Worksheet 42 Financing growth


Plenary: Finance Bingo1. Draw a 9 box grid2. Choose 9 keywords from orange box and write them in.

Long term Short Term Overdraft Factoring LoanMortgage Leasing Share Dividend SavingsRetained profit Collateral Venture capitalist Trade Credit Shareholder Share Capital


Give us a clue!– Identify theLong term Finance keywords

ShareholdersShare capital

Venture Capitalists

GrantsDividend

Collateral

Mortgage

financing growth chapter 15 pages 80-83. aims for today to identify ways of financing a business...

Documents

internal sources of

external sources of

internal external sources

new business

external finance options

business buys

main sources

internal expansion