Source of Finance

Topics: Debt, Finance, Corporate finance Pages: 12 (3121 words) Published: November 2, 2010
Table of Contents
1. Identify and describe the various sources of finance
1.1 Internal source
1.2 External sources
2. Assess the implication of the difference sources of finance related to risk, legal, financial and dilution of control and bankruptcy
2.1 Issue debt
2.2 Issue equity
3. Select appropriate sources of finance and make recommendations on the best ways of raising finance TASK 2:
Part 1: Assess and compare various costs involve with each source of finance to Vale filters Limited Part 2: Prepare cash budget for Vale filters Ltd. And discuss the importance of financial planning

2.1 The importance of financial planning
2, Prepare cash budget



Alan Simpson and his colleague Geoff want to set up a business that produces and markets filters which are used with chemical after testing successfully. The company is called VALE FILTERS. However, their own capital isn’t enough so that they want to find others financial source. They also know six other people who are interested in investing in their business. As a Financial Advisor in a Consultant Company, I’ll give them the basic information of available various sources of finance, implications of each source and based on that I’ll evaluate and give recommendation.

Part 1: Identify and describe the various sources of finance: All sources of finance can be put into 2 categories: internal and external source.

1.1 Internal sources:
+ Personal saving + Retained profit + Working capital + Sale of assets * Personal saving: The money of the business owners, such as their own cash or saving account, invest directly to the business. * Retained profit: Retained profit is the profit which company make but don’t spend, it is kept or saved in the bank. * Working capital: Working capital is the money is used in the short-term to pay for the day-to-day activities of company. The calculation : WC=Current asset-Current liability * Sales of assets: Capital can be gained by selling fixed assets when these are useless or company need capital to invest, pay debt and so on.

2.2 External sources:
+Ownership capital+Non-ownership capital
* Ownership capital: The capital is raised by issuing shares from shareholders. There are two kinds of shares: ordinary shares and preference shares This source can be used to invest to public or private limited company not for sole traders or partnerships. * Non-owner capital :

+Issue debt note +Other loans +Overdraft facilities +Hire purchase +Lines of credit from creditors +Grants +Venture capital +Business angel +Factoring and invoice discounting: +Leasing +Franchising -Issue debt note: There are two kinds of issue debt note: debentures and bonds. Debentures is kind of debt which is unsecured. This source is based on the reputation and creditworthiness of borrowers. Limited company can also issue bonds to raise capital but bonds are secured. - Bank loans: This source need strict requirements. The bank’s decision will base on the CAMPARI principle: +Character of borrower +Ability to borrow and repay +Margin of profit for the banker +Purpose of the loan Amount of the loan +Repayment terms +Insurance against non-payment (security) Borrowers need to pay interest periodically which is set by bank. Bank also determine the fixed date that borrowers must repay on or before that. - Overdraft facilities: This source is suitable to business that need capital to solve the small capital problems, such as cash flow, but they don’t need long-term loan. In this case, they can arrange with bank to issue overdraft with lower interest. The interest is based on daily basis. - Hire purchase:

It is a kind of transaction that business can buy assets without paying full amount immediately but they have to pay gradually for a period through contract. After paying all, business can become the...
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