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BTEC Business Studies

Assignment 3- Finance & Budgeting

P4- Sources of Finance
Name Dominic Clark
Introduction: In this piece of work I have provided accounting advice on the set up of my friends new
hairdressing business as a result of taking an accounting course to strengthen my employability skills.
I have described the various sources of potential finances from institutions, which include loans and
grants, as well as looking at government and personal sources of finance. I have then looked into
identifying how these finances are accessed.

Long Term

Medium Term

Short Term

Finances the whole business

over many years

Finances major projects or

assets over a long-life

Finances day to day trading

of a business

Debentures - This works very much like shares in a

business. Investors purchase debenture certificates
from the business, and can be resold to other
investors (should the first investor need immediate
funds). The company provides each of their
debenture investors with an interest year-on-year
for a specific timeframe. Businesses must be
incorporated to use this form of finance.

Hire Purchase - This is basically a credit method for

a business to not pay for a product/service
immediately, they are entitled to pay this back over
a given timeframe. This is beneficial as the company
would not have to pay for the product/service
upfront in a large amount, but rather in small chunks
over some time.

Bank Overdraft - This is when a companys funds are in a

negative balance. A bank will allocate a maximum amount
of negative balance for firms. This is useful for short term
financing as companies can withdraw excess funds (more
than there is in the account).

Long-Term Bank Loan - This is a loan that is funded

by a bank which must be paid pack with interest
remittences. These interest rates may be fixed or
have the possibility of varying year-on-year. This
would be the result of governments raising the base
rate. Payments must be paid regularly as specified
by the lending firm.

Leasing - This is a method where a company are entitled to

use a product or service by paying regular rental
remittence. This entitles companies to utilise products and
services for a cheaper price. This is usually specified on an
official contract set over a period of time. When the
contract comes to an end, so does the lease, and the
company may use more updated goods on a new contract
that they may start.

Debt Factoring - When some companies sell good/services,

they can sometimes sell it on credit. These companies have
official records of the balance owed to them by their
debtors. For a company to seek immediate finance, they
can sell their Debtors Book to another firm at a lower price
than the actual value to raise capital.

Venture Capital - These are firms which a specially set up to invest

in companies looking for funds, which banks do not agree to finance
due to risky measures. As a result of financing these businesses,
venture capitalists take an equity of the company, if they believe
the return would be satisfactory. These could also be Business
Angels who are wealthy investors looking for opportunities to put
their money into, to gain equity in potentially successful businesses.
An example of this is seen on the UK television show Dragons Den.

Medium-term Bank Loans - This is basically a bank

loan that is paid back within a shorter term. This
means that the company must pay back their loans
faster, and should they not be able to, they may be
liable to legal consequences.

Trade Credit - Some goods and services are sold to

businesses using credit transactions. These transactions
have a timeframe in which the payment has to be made,
which could be a few weeks or even up to a month. What
this means is that the business purchasing the goods can
actually resell the product or use the product to generate
business before paying for the product/service.

Government Aid - Occasionally governments will

issue aid in regards to finances to companies. Such
funds may be sourced from governments at different
levels (i.e local or central). This is mainly popular
amongst firms looking to start up or expand in weak
economical locations.

Building Societies - These offer funds to businesses in the of

loans, business accounts, commercial mortgages or
overdraft. This is dependant on the business plan of the
business. Building societies will base the decision to invest,
as well as the interest rate, based on how risky the
business is.

Friends and Family - Investments and financial boosts from

close individuals can be the easiest form of obtaining
finances for a start-up business. This can be either paid
back as a loan, or the business director may issue shares to
these individuals.

Equity - When limited companies are established

equity would be the primary origin of finances for
that respective firm. Shares would be distributed,
and in return shareholders would provide
investments to make payments for the business start
up. The maximum capital being put into the business
must be stated in the memorandum of association
document (a legal corporation document).

Hairdressing Business Finances

The best sources of finance for starting up a hairdressing business would be for Paul to
source his hairdressing supplies form suppliers that allow him to make purchases on trade
credit, where he can begin to generate income before paying back the costs for his supplies.
He should seek funds from close friends/family to allow him to minimise loans and interest
rates. Finally, he should attempt to obtain a high overdraft maximum to allow Paul to pay
for goods/services without having the funds in his bank account if he needs to.
For paul to keep his hairdressing equipment updated regularly, without making large
payments, he should utilise hire purchases to not have to purchase equipment, but at the
same time using the best tools for the business. Regarding his establishment, it may be best
for him to rent commercial property in apposed to purchasing it, if he wishes to expand in
the future. Should Paul wish to open his hairdressing salon in a less developed location, he
may want to seek financial aid from building societies and the government. Utilising a
medium-term loan is very risky, and given the hairdressing market is so broad, I would not
recommend it.
For the expansion of Pauls salon, he should approach venture capitalists only if he has a
very unique product that would appeal to such organisations. If not, the best options for his
business would be to sell debentures or to give out equity for immediate funds. If he is
looking to expand without giving out parts of his business, the most viable option would be
to take out a long term loan for expansion.

Examine Two External Sources of Finance

that Kellett School could have used to
Finance its Capital Expenditure
Equity - This method is for Kellett school to seek investors to help with the
development and capital expenditure of the business. This would mean
giving away shares in return for finances from investors for capital
expenditure such as facilities developments. Providing equity is a source of
finance that benefits the school in the sense that they will not have to make
any loan payments or provide any interest fees. This will allow the school to
access immediate funds for capital expenditure purposes. However, giving
out equity means that less profit can be made in the future due to
distributing shares and equity of the business. This leaves less a potentially
lower budget for future capital expenditure due to smaller profit share.
Long Term Bank Loan - This method is for the management of Kellett school
to approach banks in hopes of obtaining a bank loan to pay back over a long
period of time. This means the school can receive funds and attend to the
necessary school developments through utilising the funds obtained from the
bank. This also means that the school do not need to give away any shares,
and as a result, any future profits. However this could be risky for the
school. As interest remittences could vary year-on-year, long term loans
could cost them a large sum of money year-on-year.