Unit 2: Business Resources
Assignment 4:P4
Sources of Finance
Internal Sources of finance
Owners’ savings- the owner of a business often has to use their own personal savings to start a business, particularly if they are a sole trader. This is because banks may not be willing to take a risk and invest in them. Savings are a good source of finance for a business, as interest does not need to be paid to someone else while the money is being used, and the business remains totally in the control of the owner. In any business venture it is always an advantage to be using your own money because the freedom of spending it how you please is up to you, however there is a high risk factor with personal savings, the chance of losing
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Leasing hosts many business opportunities for big companies and small too, it is a great method of making capitals last and reduces business cost also good for record keeping. One major disadvantage of leasing is maintaining the goods, for example if you managed a logistic delivery company and leased the vehicles if an accident occurred and the vehicle was destroyed you would be liable to pay the full amount to the leasing company and would have nothing to show for it.
Venture Capitalists- these are people who invest in new and up-and-coming risky ventures, usually in return for a share of the ownership. An advantage of venture capitalist is the establishment in the business environment they might have, if you were inexperienced you could use their knowledge of the corporate business industry, methods, tactics and strategies to make it as a new business or survive as a present business. A huge disadvantage about Venture Capitalists could be the agreements you make for instance if they wanted a short term pay out from the owner, which was a high amount and a big interest rate it might be hard to pay in the time required in the contract. Many venture capitalists would specify upon agreements that the original owner of the business has to pay back a large amount of the money invested with a usually high interest rate in a short time period. The reason for this is the Venture Capitalists want their money back and profits either made from the business or out of
Disadvantages of leasing include the zero accumulation of equity. Also if the lease period is too long, you could be locked into an agreement for space that no longer serves your needs. Additionally, the property manager or landlord can limit expansion and modification (Spohn, 2010). These issues would need to addressed with the landlord prior to avoid any issues post-signing.
Leasing business equipment and tools preserves capital and provides flexibility. Less Capital Investment will be required as part of this setup, as compared to owning the equipment.
Leases are contracts between the lessor (owner) and the lessee (client) to use an asset for a specified period of time in exchange for rental payments over the term of the lease. For many companies leasing an asset verses owning has distinct advantages. Leasing offers companies the option of financing at fixed rates and flexibility giving them financial stability, cheaper rates, and the option of short or long-term leases; it allows the lessee to upgrade the asset so they can remain competitive in the market; it offers tax advantages reducing their taxes and leasing offers off-balance sheet financing which doesn’t increase their debt thus aiding in the potential for future borrowing. (Kieso et al., 2016, P.1198)
The small business I envision to own is a cleaning company which basically cleans offices and homes. Often the hardest part of starting a business is raising the money to get going. I may have a great idea and clear idea of how to turn it into a successful business. However, if sufficient finance can’t be raised, it is unlikely that the business will get off the ground. I will therefore invest my personal cash balances into the start-up. This is a cheap form of finance and it is readily available. Investing my personal savings will maximize the control I keep over the
Leasing a car is another term for renting, it is a way to make a car purchase a vehicle with less risk. The risk is reduced as you have the option to return the car after the term ends, meaning you don’t ever have to worry about owning more than the car is worth. Cars are not generally assets that store value, their value deceases as the car is driven and become older.
In today’s world, customers often face a dilemma about whether to buy or lease. Lease is an agreement in which one party gains a long term rental agreement, and the other party receives a form of secured long term debt. On the other hand, buying involves transfer of ownership from seller to buyer. Buying or leasing decision depends mostly on customer’s preference. There are many factors to consider before taking a buying or leasing decision.
Short term target -Their short term target is to increase within 2 years. The staff members should be increased from 5 to 10 and students from 100 to 200. Their short term turnover target is to increase their turnover to 2-3 million.
Angel Investors - The main business angels vary from venture capitalists in their motives and level of involvement. Often angels are more involved in the business, providing ongoing mentorship and advice based on experience in a particular industry. For that reason, matching angels and owners is critical. There are substantial easily locatable networks of angels. Pitching to them is no less demanding than to a venture capitalist as they still review hundreds of proposals and accept only a handful. Often the demands around exit strategies are different for an angel and they are satisfied with a slightly longer term investment (say 5-7 years compared to 3-4 for a venture capitalist).
Also, it is even hard to replace a fully depreciated asset or the lack of capital budget may occur. Sometimes leasing provide several benefits to company such as reducing its cost, provide flexibility to company to avail the opportunity of new technology if needed rather than waiting for getting rid of an old asset in order to buy the new one. Also buying an asset makes companies to be held to a depreciation schedule or the approval of a capital budget for new equipments.
Sole trader- A person who owns a business on their own is called a sole trader, they therefore have to supply all the capital income from their own sources or reach out to a bank using their own assets, such as their house to secure a start-up loan, therefore this makes the investment very high risk as they are solely responsible for all debts the business may come into. The size of the business can also be affected because of this however if the business becomes successful the owner can keep all of the profits to himself/herself.
A debenture is the most common form of long term loan that can be taken by Humbro. Debentures are usually loans that are repayable on a fixed date this is in the statement of financial position under the heading Non-current liabilities (8,000) in both 2011 and 2012. Most debentures pay a fixed rate of interest which you can also see in the statement of financial position under current liabilities titled debenture interest (800) for year 2011 and 2012. The main advantage of a debenture to companies is the fact that they have a lower interest rate than overdrafts. They are usually repayable at a date far off in the future.
Starting a business requires capital so as to run and steer the business to profitability. There are many sources of financing tailored to meet the needs of start-ups and small businesses. Business financing usually varies depending on factors such as source of funds and the size and type of business. The process of securing funds can also be problematic for most start-ups and small business because of the unwillingness of most traditional banks to provide funds to small borrowers. Here are some of the main non-banking financing options for startups and small businesses:
The last one Venture capitalists. It is finance provided for an equity stake in a potentially high growth company.