ocr cambridge tec - level 3 certificate/diploma business lo3 - know how to access sources of finance

OCR Cambridge TEC - Level 3 Certificate/Diploma Business

LO3 - Know how to access sources of finance

Unit 02 - Business Resources D/502/5409

Scenario Criteria Tasks Assessment1 2 3 4 5 6 7

Learning Outcome (LO) The learner will:

Pass The assessment criteria are the pass requirements for this unit. The learner can:

Merit For merit the evidence must show that, in addition to the pass criteria, the learner is able to:

Distinction For distinction the evidence must show that, in addition to the pass and merit criteria, the learner is able to:

1 Know how human resources are managed

P1 Describe the recruitment documentation used in a selected organisation

M1 - Analyse the recruitment documentation of a selected organisation

P2 Describe the main employability and personal and communication skills required when applying for a specific job role

2 Know the purpose of managing physical and technological resources

P3 Describe the main physical and technological resources required in the operation of a selected organisation

3 Know how to access sources of finance

P4 Describe sources of internal and external finance for a selected business

M2 - Analyse the advantages and disadvantages of a range of different sources of finance for a selected business

D1 - Evaluate the best source of finance to meet the needs of a selected business

4 Be able to interpret financial statements

P5 Interpret the contents of a trading and profit and loss account and balance sheet for a selected company

LO3 - Assessment Criteria


LO 3 Know how to access sources of finance Learners could work in groups to prepare a guide to business finance. The guide

should outline the availability of various sources of finance, as well as their respective advantages and disadvantages. Learners could use various sources to assist them, including leaflets and booklets from banks. Learners could then be asked to participate in a role play, whereby they are asked to play the role of an advisor, and recommend a suitable source of finance for a business in differing scenarios.

For P4 - Learners could create a wall chart to describe the sources of internal and external finance for a selected business.

For M2 - Learners could produce a report for the management team of a selected business that analyses why some sources of finance might be preferable to others for the business.

For D1 - Learners must evaluate the best source of finance for a business, given its current needs. Learners will need to reason what makes it the best source of finance, and consider any risks involved.

Scenario and Assessment Criteria – P4, M2 and D1


Almost half of all new ventures fail in the first year of operation, an additional 30% in the second year because of poor financial management. This could be because of lack of customer, lack of funds, market forces or a lack of business acumen. Different forms of internal sources of finances include:

For the business selected company you will need to look at the forms of Internal Finance that are available in order to survive. P4.1 – Task 01 - In general terms describe and research the different forms of internal finances that could be available for companies and research and state the benefits and disadvantages of each.P4.2 – Task 02 - Based on the business selected company, describe the internal sources of finance that are available within the business to access beyond its own bank account.

Owners Money Savings/Retained Profit

Share Issue

P4.1 - Internal sources of finance


Owner or owners funding - This is the amount of money that a business person, partner or invested stakeholder has at their disposal. This is an easily accessed asset in terms of availability though owners may be loathe to invest more money in the business. If the owner uses their own savings to invest in their own or another business,

then the source of finance does not have to be explained, negotiated or agreed by external shareholders.

Partnerships can be used as a means of subsidising a company by numerous people with an agreed set of profit shares and benefits.◦ Although we would generally recognise personal savings as a source of

finance for small businesses, there are many examples where business people have used substantial sums of their own money to help to finance their businesses. This is called entrepreneurships.

◦ A good example of this is Jamie Oliver. Jamie financed his restaurant chain, 'Fifteen', using fifteen raw recruits to the catering trade and a large amount (£500,000) of his own cash. This means he is invested in the success of the company.

P4.1 - Internal sources of finance – Owner’s Money


Retained Profit – This is when a business makes a profit and it does not spend it, keeping it aside for whatever it wishes. Accountants call profits that are kept and not spent retained profits. This money is cash in the bank, gaining interest, called rainy day funds, easily accessible, does not need to be explained and be spent as the company likes.

This retained profit becomes available to use within the business to help with buying new machinery, vehicles, expanding to new premises, updating computers etc. or developing the business in any other way. Retained profits are also kept in case the owners believe that they may have difficulties in the future. For some companies this Kitty fund is used for legal protection.

Retained earnings, also known as retained surplus, are the portion of a company's profits that it keeps to reinvest in the business or pay off debt, rather than paying them out as dividends to its investors, reducing debt payments and accrued interest.

Sometimes retained earnings can be used to increase the supply of cash that's available for acquisitions, repurchase of outstanding shares, or other expenditures like takeovers or mergers.

Smaller and faster-growing companies tend to have a high ratio of retained earnings to spend on research and development or new product expansion. Older companies tend to pay out a higher percentage of their profits as dividends. Most educational establishments store two months staff salaries in a bank in case of problems, cutting into it to fund expansion plans before refilling the gap but during the period of premises expansion there is a risk.

P4.1 - Internal sources of finance – Retained Profit


There are three main ways of raising equity finance:

1. Retaining business profits (rather than distributing them to equity shareholders)

2. Selling new shares to existing shareholders (a "rights issue")

3. Selling new shares to the general public and investing institutions Shares are a way of selling a business interest in a company without affecting stock

or equipment. Share sales can be a quick way of raising a lot of money over a short period of time. Up to 49% of a company can be sold through shares in order to maintain overall governing control but share fluctuations after share sales can have complications for a company, specifically a Public Limited company or partnership.

Look at: http://www.fool.co.uk/news/investing/2009/05/26/famous-scams-the-enron-scandal.aspx for ways that companies benefit from Share dealings and creative accounting.

The downside is share trading can take time and can destabilise trust within a company, specifically if there are shares already available.

P4.1 - Internal sources of finance – Shares

http://www.fool.co.uk/news/investing/2009/05/26/famous-scams-the-enron-scandal.aspx

http://www.fool.co.uk/news/investing/2009/05/26/famous-scams-the-enron-scandal.aspx


How significant are new issues of shares in the UK? Issues of new shares to the public account for around 10% of new equity finance in

the UK Whilst not significant in the overall context of UK equity financing, when new issues

do occur, they are often large in terms of the amount raised New issues are usually used at the time a business first obtains a listing on the Stock

Exchange. This process is called an Initial Public Offering (“IPO”) or a “flotation”

Methods The process of a stock market flotation can apply both to private and nationalised

share issues and means selling a bulk of the company to the general public of private investment in order to raise a lot of capital in a hurry. Company shareholders often buy a lot of shares to increase their own worth but sell their own shares when they feel the company will be devalued. Otherwise Shares as a financial asset is not as secure as profits or owner investment.

P4.1 - Internal sources of finance – Shares


Method of Finance Advantage of Use

Disadvantage of Use

Why it may or may not be preferable

Consequence

Owners moneyRetained ProfitSelling shares

M2.1 - Task 03 – For your Company, state the advantages and disadvantages of each internal financial method and what it could mean to the business should they choose this path to finance their business functions.

For instance Selling shares may not be preferable because it leaves the company open to hostile buyouts when a rival buys up enough shares to take ownership and leaves the company value prone to stock market fluctuations.

Consequence – Value of the company becomes less, the company can no longer borrow as much from the bank based on company worth and will need to rely on asset worth or owners money. Use the template attached as a guide to expectations.

M2.1 – Internal Sources of Finance – Company Preference


Different forms of external sources of finances are available to companies and each has a different level of security and importance to shareholders and stakeholders. These can include Government sponsorship, local and national, start up grants, local community sponsorship, voluntary support, subsidiary company funding and first year start discounting on tax and DTI support and others.

For the business selected company you will need to look at the forms of External Finance that are available in order to survive.P4.2 – Task 04 - In general terms describe and research the different forms of External finances that could be available for companies and research and state the benefits and disadvantages of each.

P4.2 – Task 05 - Based on the business selected company, describe the External sources of finance that are available within the business to access beyond its own internal means.

P4.2 - External sources of finance

Factoring Debentures Grants Overdrafts

Bank Business Loan

Business Mortgage

Hire Purchase (HPI)

Asset Sale / Lending

Trade Credit Business Capital Leasing


Invoice Factoring enables a business to get paid when they raise their invoices after sales, regardless of when the business customer actually pays them. It takes away all the difficulties of chasing money and helps remove the complication of not knowing when the company might get paid. Invoice Factoring is usually quicker, less problematic method of improving the business cash flow where the business gets the advantage of financial funding without the pressure of chasing clients to survive.

How does Invoice Factoring work? Instead of waiting for customers to pay the business invoices, after goods are delivered, the

company sends copies of their customer’s invoices through a factoring agency who specialises at this financial practice. The company can then draw up to 95% of the value of the sale, immediately – with the final balance available once the agency has collected the money from the business customer, for a fee. No more waiting months for the payment to be made. No more wondering when the company is going to get paid for goods or services.

This is especially prevalent in the building trade where materials are bought on spec, stored and used months later before payments are sent. With companies going bust more regularly, companies like to hold back for as long as possible to avoid payment. Business factoring pre-empts this.

Basically Invoice Factoring means that a dedicated company takes responsibility for securing the payment from customers. A good provider will do this efficiently, courteously and professionally in order to maintain customer relations, often tailoring their service to their business culture.

P4.2 - External sources of finance – Invoice Factoring


Debentures are guaranteed loans that are usually secured from a bank on a pre-set agreement and are said to have either fixed or floating charges attached to them. A secured debenture is one that is specifically tied to the financing of a solid

and desirable asset e.g. a building or a machine like a guarantee. Then, just like a mortgage for a house, the debenture holder has a legal interest in that success of that asset and therefor the company cannot dispose of it unless the debenture holder agrees. If the debenture is for land and/or buildings it can be called a mortgage debenture.

Debenture holders therefor have the right to receive their interest payments on the asset before any dividend is payable to shareholders and, most importantly, even if a company makes a loss, it still has to pay its interest charges. Banks do not lose money, ever.

Worse case scenario, if the business fails, debenture holders will be held as a preferential creditor and therefor will be entitled to the repayment of some or all of their money before the shareholders or liquidators receive anything.

P4.2 - External sources of finance - Debentures


A business loan is an amount of money borrowed by a business owner to start or run a business. Realistically, a business loan is used by lending institutions to describe personal loans given to business people. Consider that a company may have an excellent credit rating and a solid business plan

and still not be able to get a business loan because they have no collateral. Even established businesses can find themselves in this position, if they do not own enough tangible assets, such as houses or other property. Examples included Nokia, Boo, Fanny Mae and Bernie Mac.

Therefor, the business loan is not being granted on the status of the business asset worth; it's being granted on the business personal financial status. That's why it's important that the business personal financial house is in order before the owner applies for a potential business loan.

Business Loans are provided at a higher interest rate than a personal loan and the condition of a small degree of influence and investment from the Bank to protect the return on investment. Owners will also find that many lenders just don't provide seed money. While they're perfectly willing to give a business loan to help a business grow, they don't want to take the risk of lending to a start up.

P4.2 - External sources of finance – Business Loans

http://sbinfocanada.about.com/od/financing/g/collateral.htm


A Business Mortgage is a larger agreed amount than a bank loan, specifically for larger businesses. When the owner takes out a business mortgage they are effectively taking out a special type of Commercial Loan, whereby the lender will gain legal rights over the property in question until the business is able to fully repay the loan. Therefor companies need to carefully consider the effects taking out a business mortgage will have on the finances of their company.

Business mortgages usually last a maximum of 20 years. In order to make a successful application, companies need to be able to demonstrate sufficient probability of repayment. Any business and financial plans will help and the owner will need to be prepared for an inspection of the property in order to ascertain current market value.

In order to make a down payment for a business mortgage the owner will generally be asked to provide 20-30 per cent of the purchase price, twice the house mortgage rate. However some businesses may only be required to provide much less (although interest rates will reflect this) depending on the nature of the company and the potential return on investment.

P4.2 - External sources of finance – Business Mortgage


Business Mortgage - Advantages and Disadvantages The advantages of purchasing a property via a mortgage as opposed to renting

include subletting potential (generating extra revenue), mortgage repayments are cheaper than most current rents, and a repayment schedule which has fixed monthly overheads becomes a secured payment.

Disadvantages include the increase in management responsibilities for the property, maintenance, security, health checks etc. A mortgage will also need to be subsidised by money from the business in order for it to become their property again, this can be quite draining on the finances of a small business so the sums need carefully working out before committing to anything.

A more obvious down-side of taking out a small business mortgage is that it immediately becomes much harder to relocate the central activities of the business company than it would have been through renting.

The common rule is to try to agree a period of grace - a few days for each repayment date to give the company a bit of leeway and reduce the stress levels should anything go wrong or there is a delay in asset or stock sales or invoice payments.

P4.2 - External sources of finance – Business Mortgage


Business capital or Venture Capital is a type of private equity capital typically provided to start-up, high-potential, growth companies in the interest of the investor generating a return through additional investment, takeovers or an eventual realisation event such as an IPO (Initial Public Offering) or trade sale of the company.

Business capital investments are generally made as cash injections with few conditions or in exchange for shares in the invested company or part ownership. It is typical for venture capital investors to identify and back companies in high technology industries such as biotechnology and ICT.◦ Venture capital typically comes from institutional investors, entrepreneurs, and high net

worth individuals, and can be pooled together by hired dedicated investment firms.◦ Venture capital firms typically comprise small teams with technology backgrounds

(scientists, researchers) or those with business training or deep industry experience. Business Capital has a reputation of being a particularly impenetrable career path, employing only those who bring expert value.

◦ A core skill within Business Capital is the ability to identify emerging technologies that have the potential to generate high commercial returns or income streams at an early stage. By definition, Venture Capitalists also take a role in managing entrepreneurial companies at an early stage, thus adding skills as well as capital (thereby differentiating Business Capital from buy out private equity which typically invest in companies with proven revenue), and thereby potentially realizing much higher rates of returns.

P4.2 - External sources of finance – Business Capital


There are a wide range of grants and subsidised loans available to UK businesses and all companies apply for them. Financial aid is available to help support business expansion, to provide funding for research and development, to support training initiatives, to help acquire new premises or refurbish existing buildings or to support international expansion, or even to go green.

Whilst the provision of actual funding is usually the most important issue, grant aid help can also come in many different forms. For example, certain grant agencies will provide assistance in finding investors, to help in generating new export leads or introducing experts to accelerate the development of new product ideas and strategies.

The availability of grants and subsidies often depends on which sector a business is in. Farming particular is well funded, click here. Sometimes grants come when a company plans to relocate, the area being relevant (Corby as opposed to Chelsea) how well the application is made and timing (some grants only last for a certain period or until the funding has been allocated, usually after 1st April, new tax year).

The key factor in winning grants and subsidies, and it is a competition at the end of the day, nothing is guaranteed, is whether the funding results in the creation of jobs, especially in regional or local areas that particularly need them.

P4.2 - External sources of finance - Grants

http://www.nature.com/nature/journal/v439/n7079/full/439908a.html


The Enterprise Finance Guarantee (EFG) replaces and improves upon the successful Small Firms Loan Guarantee scheme. This Government-backed business loan is designed to help established viable companies looking for additional funding or working capital where businesses can raise anything from £25,000 to £1 million.

How does the Grants Funding work? The Government through the BERR (formerly the DTI) guarantees

up to 75% of the business loan. Designed for small and medium businesses, it’s an excellent scheme that can be used for a wide range of business purposes.

Look at Corus here and analyse whether State Funding should be allowed for a company that is likely to go bust or whether the company should cut and run with redundancies for workers while they have assets they can sell.

P4.2 - External sources of finance - Grants

http://www.nature.com/nature/journal/v439/n7079/full/439908a.html


Overdraft financing is provided when businesses make payments from their business current account exceeding the available current cash balance. An overdraft facility enables businesses to obtain short-term funding although in theory the amount loaned is repayable on demand by the bank and accrues interest beyond the agreed overdraft rate. There are several important factors to consider when assessing the appropriateness of

an overdraft as a source of funding for businesses:◦ The amount borrowed should not exceed the agreed limit. The amount of the

facility made available is a matter for negotiation with the bank.◦ Interest is charged on the amount overdrawn at a rate that is above the Bank Base

Rate. The bank may also charge an overdraft facility fee.◦ Overdrafts are generally meant to cover short-term financing requirements, they are

not generally meant to provide a permanent source of finance.◦ Depending on the size of the overdraft facility, the bank may require the business to

provide some security, for example by securing the overdraft against tangible fixed assets, or against personal guarantees provided by the directors.

P4.2 - External sources of finance - Overdraft


Advantages The amount of an overdraft at any one time will depend on the cash flows of the

business, the timing of receipts and payments, seasonal trends in the sales and so on. Banks use a company’s cash flow statement as their basis, the business generates a

positive overall cash flow in a full year as evidence of sustainability. Overdrafts can be relied on if business practice has proven reliable and the current

situation has not changed.

Disadvantages Due to the timing of sales receipts compared with supplier payments, the business

usually need to fund a temporary overdraft during the year called a bridging loan at a higher rate of interest.

Overdrafts are considered debt and on some ratios this changes the values for certain investment potentials.

If there is a hint of difficulty, a bank will call in the overdraft, if the money is not forthcoming, they can secure the overdraft against current and future sales limiting the selling and purchasing power of a company.

P4.2 - External sources of finance - Overdraft


Leasing - The acquisition of assets, particularly expensive capital equipment like machinery or premises, can be a major commitment for many businesses. How that acquisition is funded requires careful planning. Rather than pay for the asset outright using cash, it can often make sense for businesses

to look for ways of spreading the cost of acquiring an asset, to coincide with the timing of the revenue generated by the business. The most common sources of medium term finance for investment in Capital Assets are Hire Purchase and Leasing agreements.

Leasing and hire purchase are financial facilities which allow a business to use an asset over a fixed period, in return for regular payments. The business customer chooses the equipment it requires and the finance company buys it on behalf of the business.

The biggest benefit is that as soon as the asset has been used or function served, then the asset is returned.

Many kinds of business asset are suitable for financing using hire purchase or leasing, including:

Plant and machinery Commercial vehicles Agricultural equipment

Temporary Premises Function equipment Office equipment

Film Production Equipment Event Planning Equipment

P4.2 - External sources of finance - Leasing


Hire Purchase is similar to leasing but with one major benefit. With a hire purchase agreement, after all the payments have been made, the business customer becomes the owner of the equipment. This ownership transfer either automatically or on payment of an option to purchase fee.

In terms of Tax, from the beginning of the agreement the business customer is treated as the owner of the equipment and so can claim capital allowances. Capital allowances can be a significant tax incentive for businesses to invest in new plant and machinery or to upgrade information systems.

The use of hire purchase is a popular method of funding the acquisition of capital assets. However, these methods are not necessarily suitable for every business or for every asset purchase. There are a number of considerations to be made, such as - Certainty.

Certainty One important advantage is that a hire purchase is a medium term funding facility, which

cannot be withdrawn, provided the business makes the payments as they are due. The uncertainty that may be associated with alternative funding facilities such as overdrafts,

which are repayable on demand, is removed. However, it should be remembered that hire purchase agreements are long term

commitments. It may not be possible, or could prove costly, to terminate them early.

P4.2 - External sources of finance – Hire Purchase


Asset Based Lending is a fast way to raise corporate finance – and businesses can often raise as much as 50% more than many other invoice financiers. This method of finance is based on asset valuation and borrowing money based on this. A company with a high degree of stock, machinery, premises etc. will have a high asset worth and borrowing on this is a guarantee of funding.How does Asset Based Lending work?

Asset Based Lending generates finance against existing assets in the business. This enables a company to raise funds secured on assets they already own. Provided in conjunction with Factoring or Invoice Discounting, Asset Based Lending can typically raise significant additional funds in a hurry: ◦ Up to 95% on outstanding invoices ◦ Up to 80% of the market value on plant and machinery ◦ Up to 30% on raw materials ◦ Up to 50% on finished products ◦ Up to 80% on property

Using Asset Based Lending, a business can typically raise anything from £50,000 to £50m in corporate finance to support business expansion, takeovers, MBI, MBO’s (Management Buy in and Out) or other funding requirements.

P4.2 - External sources of finance – Asset Sale/Lending

http://www.venture-finance.co.uk/our-services/factoring/what-is-it.aspx

http://www.venture-finance.co.uk/our-services/invoice-discounting/what-is-it.aspx


Advantages Companies are not legally obligated to make payments to stockholders, so long

as the board of directors acts in best interest of company. Stock improves the credit rating of company because it increases the amount of

capital in company, making it safer against hostile takeover or forced mergers. Stocks are attractive to some investors as hedge against inflationDisadvantages Common stock owners have corporate voting rights and control can be

transferred to new stockholders when Asset Lending puts the company at risk when repayments are defaulted on.

Shareholders share in the profits through dividends, but the net worth of the company is devalued when Assets are loaned against.

Defaulting on an Asset Loan can force the bank to sell the assets at base level to recover Asset Loans forcing the company to purchase new assets or buy back their assets at a lower value..

P4.2 - External sources of finance – Asset Sale/Lending


Trade credit is one of the important sources of short term financing options employed by certain firms, especially in the building and construction trade. Trade credit may be defined as an arrangement to buy goods and/or services on account, i.e. without making immediate cash or cheque payments. This debt is usually recorded as “accounts payable” and is considered to be the single most important short term credit option for firms. How does it help?

Trade credit is considered to be an important tool to finance business growth. When a business’ suppliers allow for trade credit, they allow firms to buy from them in present and pay in future. Such arrangement enables firms to take orders, make deliveries and then pay, effectively putting less pressure on cash flows to make payments on immediate purchases.

Consequently, trade credit (if managed properly) helps reduce the capital required to operate a business. For Building firms, houses get built, raw materials are purchased on credit, sold close to completion and then the debt is paid back. This is better than off-plan purchases because of the risk.

P4.2 - External sources of finance – Trade Credit


How does it work? When firms enter into a trade credit arrangement with their

suppliers, Jewson's etc., a certain “credit term arrangement” is usually set. Cash / cheque payments made within this term, e.g., 20 days from the date of purchase, may qualify for a certain discount. However, if payments are not made within this term, all receivables are required to be settled within a stipulated time period. E.g. 60 days from the date of purchase. The cost of NOT availing the discount is the cost of credit.

The credit term may differ for different types of businesses. Businesses that receive payments on delivery like an online shopping site, may have a shorter credit term than a steel manufacturing unit where projects are of a longer duration, and payments may be received periodically on completion of certain pre-decided milestones.

P4.2 - External sources of finance – Trade Credit


Method of Finance Advantage of Use Disadvantage of Use

Why it may or may not be preferable

Consequence

Invoice FactoringDebentures

Business LoansBusiness Mortgage

Venture CapitalGrants

OverdraftsLeasing

HPAsset Sale

Trade Credit

M2.2 - Task 06 - State the advantages and disadvantages of each external financial method and what it could mean to the business individual business should they choose this path to finance their business functions. Use the template attached as a guide to expectations.

M2.2 - External sources of finance – Trade Credit


Whatever decision your company makes in deciding how to finance its current state or to receive funding for additional support or expansion, there are external factors that are in place that could influence that decision, even if it means refusing a cheaper or reliable source of funding.

D1.1 – Task 07 - Evaluate the best source of finance to meet the needs of a selected business. Use the following as paragraph headings:

Company History Business Ownership Industry Sector Current and Future Economic Climates Stakeholder Influence

D1.1 - Sources of finance – Business Decisions


Traditionally older Companies have been through a history of ups and downs and have learned the better means of borrowing money in the longer term. A depression for instance comes every 8-10 years and lasts for 2-3, the current depression has been an exception to this.

Historically these companies may reject modern means such as crediting or debentures due to writing off bad loans in the past. They may have old alliances to tap into like Microsoft has with Intel, longer term shareholders with equity like Wozniak and Apple, partnerships that they have links to in order to amalgamate their resources like Datsun and Matsushita.

Traditionally Apple and Microsoft have been in court for battling rights issues but have since formed an alliance. Twenty five years ago the idea of Apple being supported in its business ventures by Microsoft would have been unheard of, now it is common business practice. The same with Pixar and Disney, the merge has meant Apple, who owns Pixar, is heavily in league with Disney Studios.

In your write up, state how the selected business may uses old alliances to boost their funds or similarly how they might refuse a finance means like retained profit to stabilise the company finances. Based on Company History, state which method might be best for them in current circumstances.

D1.1 - Sources of finance – Company History


When it comes to the manner of financing a company, this can also be dictated by the owners of the business and their management tactics. Some companies prefer to sell assets in subsidiary companies to finance their main business often cutting out non profitable sections through asset sales or aggressively through debt recovery.

Lloyds TSB formed the good band and bad bank and claimed bankruptcy for the bad bank in order to clear its financial burden. Similarly British telecom did this in the 80’s, O2 in the 90’s, Ford, Enron, general Electric, British Gas, British Airways, they have all cleared debts by shutting down unprofitable sections of the business.

Similarly companies run by partnerships like VW and BMW may have different tactics in how to gain financing which has to be agreed to depending on the nature of their partnership. BMW might refuse Trade credit due to its reputation, VW might refuse Asset Sale/Lending due to the financial crisis in the company that forced the merge before.

Companies run by shareholders or through Public Limited agreements may use a less aggressive tactic in order to raise funding like HP or Leasing because it is easier and puts less pressure on the company in terms of repayments.

Sole traders have more means open to them to gain financing but the risks are higher so they may not wish to finance their company future by risking their current assets.

In your write up, state how the selected business may be hindered by the owners in order to boost their funds or similarly how they might refuse a finance means like retained profit to stabilise the company finances. Based on Business Ownership, state which method might be best for them in current circumstances.

D1.1 - Sources of finance – Business Ownership


Primary sector companies may prefer to be financed through hard times by the Government in terms of bail-outs, grants and government sponsorship, promising continued employment for cash incentives, like Ford in the 1970’s and British Coal and Steel in the late 1980’s. Given the nature of the primary industry this can be their get out of jail free card.

But negatively, Shell cannot not sell itself to a foreign bidder or allow a foreign bidder through Share Ownership because the government will not allow it. In America under the Exon-Florio Amendment, major utility companies (Oil, Gas, Steel, Electricity, Water) cannot not have more than a 49% foreign stakeholder but in Britain a foreign company can own all the electric like EDF. They may not use Asset Sale either as the company and production levels rely on the assets.

Secondary companies can try the same but have less power, some may qualify for a bailout but not if it is a privately owned firm or Sole trader like Woolworths or Comet. Corus Steel’s funding problems are an example. Given the nature of the Industry, it can dictate how much power they have to demand loans and backing specifically when there are so many reliant subsidiary company considerations to take into account.

Tertiary industries have less standing for certain kinds of financial backing but they have more means of borrowing at their disposal. They may sell their Assets, Lease, Loan etc. this is business practice, as long as they pay their taxes.

Charities that suffer through financial crises traditionally get financed through the Government but when there are cutbacks in spending this can change. Reliance on lottery funding as a source of finance is increasingly popular but not guaranteed.

In your write up, state how the selected business may be hindered by the sector they are placed in order to boost their funds or similarly how they might refuse a finance means like retained profit to stabilise the company finances. Based on Industry Sector, state which method might be best for them in current circumstances.

D1.1 - Sources of finance – Industry Sector


Companies that have been around for a long time like Coca-Cola know the historical risks of borrowing money during economic crisis especially with Trade Credit Laws and asset liquidation rights for companies.

◦ Coca-Cola survived the: 1929 Wall Street crash and the Great Depression Failed investment in Germany between 1936 and 1939 1974 Decline in investment 1960’s Foreign investment clampdown Monopolies Commission

Similarly Coca Cola has invested heavily in countries abroad that have gone through political and industrial change which has seen the liquidation of their assets without recompense, Vietnam, Russia, Burma, Sudan, Serbia, Egypt etc. Most major world companies have.◦ The government seizure of all assets in Cuba in the late 50’s caused major financial

headaches for companies like Ford and Chrysler.◦ Companies who relied on the Assets for debt payments suddenly found they had less

assets and banks called in the debts. Ford was hit hard by this with a drop in sales through foreign competitors beginning to take effect.

D1.1 - Sources of finance – Current and Future Economic Climate


How a company survives these hiccups can prepare them, but also hinder them. Woolworths survived 11 depressions by buying more property when others went out of business and opening more shops. It was an aggressive tactic that worked, based on Business Mortgages when the Mortgage rate was low, cheap purchases and borrowing money base don potential sales, Debentures and Invoice Factoring. Unfortunately the current economic climate was different and this method acted against them, they borrowed based on future sales when sales were already slipping, were forced to asset sale their properties for the loan repayments, property prices fell and the company spiralled into decline that caused a closure.

Restricting the means of borrowing money from potential sources in an economic downturn can be seen by investors as financial suicide but companies traditionally have survived by learning from their own past

During the current economic climate companies are reducing assets through fire sales and clamping down on trade credit to limit the damage caused by secondary liquidated companies owing them money.

In your write up, state how the selected business may be hindered by prior knowledge of surviving previous economic climates in order to tighten their funds or similarly how they might refuse a finance means like retained profit to stabilise the company finances. Based on Current and Future Economic Climate, state which method might be best for them in current circumstances.

D1.1 - Sources of finance – Current and Future Economic Climate


From Unit 02, you should have dealt with stakeholder’s in companies and how they influence the aims and objectives of companies. Stakeholders also have a say in how a company is financed or might gain access to finances. Shareholders for instance do not appreciate second share sales within a company after trusting the board to look after them, see Channel Tunnel Funding article here to see how shareholders in company can be asked to pay more to keep a company afloat after sales.

In schools, investment from industry has been a well needed source of financial means but companies who invest in education sometimes like to have a say in how their money is spent by influencing teaching and courses taught, generally trying to influence a school to teach pupils courses that would benefit their industry.

Similarly Business in the area can dictate what courses University’s teach through corporate funding in order to guide students to their business career and local hiring. Imagine the parental and sponsor uproar if Subway invested heavily in supporting your school. But then where would Lennox Lewis College be without his financial support?

When it comes to stakeholders like chip manufacturers, mostly in China, the influence they have on products and product prices can influence companies like Apple. They would not appreciate Asset Sales as a mans of funding if the factories that produce the same chips as other Chinese products is one of those assets.

In your write up, state how the selected business may be hindered by Stakeholder Influence in order to subsidise growth or similarly how they might refuse a finance means like retained profit to stabilise the company finances. Based on Stakeholder Influence, state which method might be best for them in current circumstances.

D1.1 - Sources of finance – Stakeholder Influence

http://www.independent.co.uk/news/business/eurotunnel-to-claim-pounds-2bn-costs-1601185.html


P4.1 – Task 01 - In general terms describe and research the different forms of internal finances that could be available for companies and research and state the benefits and disadvantages of each.

P4.2 – Task 02 - Based on the business selected company, describe the internal sources of finance that are available within the business to access beyond its own bank account.

M2.1 - Task 03 – For your Company, state the advantages and disadvantages of each internal financial method and what it could mean to the business should they choose this path to finance their business functions.

P4.2 – Task 04 - In general terms describe and research the different forms of External finances that could be available for companies and research and state the benefits and disadvantages of each.

P4.2 – Task 05 - Based on the business selected company, describe the External sources of finance that are available within the business to access beyond its own internal means.

M2.2 - Task 06 - State the advantages and disadvantages of each external financial method and what it could mean to the business individual business should they choose this path to finance their business functions.

D1.1 – Task 07 - Evaluate the best source of finance to meet the needs of a selected business.

Assessment Tasks – P4, M2 and D1

ocr cambridge tec - level 3 certificate/diploma business lo3 - know how to access sources of finance

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