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Financing Growth . Chapter 15. Pages 80-83 . 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.

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financing growth

Financing Growth

Chapter 15

Pages 80-83

aims for today
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

growing a business
Growing a business

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

why might a firm want to grow larger
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
Why do firms want to grow?

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

how can firms 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

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

financing growth1
Financing Growth

Getting bigger requires investment.

This can come from 2 main sources:

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

sources of finance
Sources of finance

Internal

External

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

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

1 retained profit
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
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
3. Owners Capital or savings

When the owner uses his or her own

savings 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
External Sources of finance

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

1 share capital
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
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
3. Loans

An amount of money is borrowed from

the bank and then repaid with interest

over a set period of time. The loan period

can range from 1 year to 10 years. Look

for the APR amount – the higher the

APR the more interest is paid.

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

4 grants
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
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
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
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

slide23

Page 8 Mini book

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

task 2 role play
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?

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

task 3 finance matching activity
Task 3: Finance matching activity

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

Retained profit

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

Leasing

Money that a person has kept aside

Share

Renting of premises or equipment

Short term finance

Money that is borrowed or invested for more than 1 year

Long term finance

Profit that is kept and usually reinvested in the business

Personal savings

The owners of a company

Grants

Money that the business has to repay quickly like an overdraft

Loans

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

Shareholders

Factoring

Part ownership in a business

task 3 finance matching activity1
Task 3: Finance matching activity

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

Retained profit

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

Leasing

Money that a person has kept aside

Share

Renting of premises or equipment

Short term finance

Money that is borrowed or invested for more than 1 year

Long term finance

Profit that is kept and usually reinvested in the business

Personal savings

The owners of a company

Grants

Money that the business has to repay quickly like an overdraft

Loans

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

Shareholders

Factoring

Part ownership in a business

solutions
Solutions

Profit that is kept and usually reinvested in the business

Retained profit

Renting of premises or equipment

Leasing

Part ownership in a business

Share

Money that the business has to repay quickly like an overdraft

Short term finance

Money that is borrowed or invested for more than 1 year

Long term finance

Money that a person has kept aside

Personal savings

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

Grants

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

Loans

Factoring

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

The owners of a company

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

Shareholders

slide28
Task
  • Complete Worksheet 42 Financing growth

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

plenary finance bingo
Plenary: Finance Bingo

Draw a 9 box grid

Choose 9 keywords from orange box and write them in.

Long term Short Term Overdraft Factoring Loan

Mortgage Leasing Share Dividend Savings

Retained 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 the long term finance keywords
Give us a clue!– Identify theLong term Finance keywords

Dividend

Grants

Venture Capitalists

Mortgage

Collateral

Share capital

Shareholders

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