financing growth unit 3 topic 3.3.4. aims for today to identify ways of financing a business from...
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Financing Growth
Unit 3 Topic 3.3.4
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.
To understand how to finance a business from Internal & external sources
To understand how to finance a business from Internal & external sources
Growing a business
To understand how to finance a business from Internal & external sources
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.
To understand how to finance a business from Internal & external sources
Why do firms want to grow?
To understand how to finance a business from Internal & external sources
How can firms grow?
To understand how to finance a business from Internal & external sources
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
To understand how to finance a business from Internal & external sources
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
To understand how to finance a business from Internal & external sources
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.
To understand how to finance a business from Internal & external sources
Internal Sources of finance
To understand how to finance a business from Internal & external sources
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’.
To understand how to finance a business from Internal & external sources
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.
To understand how to finance a business from Internal & external sources
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.
To understand how to finance a business from Internal & external sources
External Sources of finance
To understand how to finance a business from Internal & external sources
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.
To understand how to finance a business from Internal & external sources
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.
To understand how to finance a business from Internal & external sources
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.
To understand how to finance a business from Internal & external sources
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
To understand how to finance a business from Internal & external sources
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.
To understand how to finance a business from Internal & external sources
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!
To understand how to finance a business from Internal & external sources
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.
To understand how to finance a business from Internal & external sources
Page 8 Mini bookTo understand how to finance a business from Internal & external sources
Task 2: Role playYou 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?
To understand how to finance a business from Internal & external sources
Task 3: Finance matching activity
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 3: Finance matching activity
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
SolutionsProfit 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 companyTo understand how to finance a business
from Internal & external sources
Where a business is able to receive cash in advance for the invoices it has issued.Factoring
Task
• Complete Worksheet 42 Financing growth
To understand how to finance a business from Internal & external sources
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
To understand how to finance a business from Internal & external sources
Give us a clue!– Identify theLong term Finance keywords
ShareholdersShare capital
Venture Capitalists
GrantsDividend
Collateral
Mortgage
To understand how to finance a business from Internal & external sources