Dear Ms C Walsh,
I’m writing to inform you about the different sources of finance that are available to you. There are twelve different source of finance available these are:
* Share issues
When your company wants capital to finance business or to run your business activities it goes to the public and issue shares to produce amount from the public and people pay the amount in share capital of your company which mean your shares in share capital of your business this process is called share issue. The advantage of share issues is that your business object becomes more profitable and has a huge amount of money to buy assets and make improvement on your business.
A business object becomes more profitable and has a huge amount of money to buy assets and advance their business. The disadvantage could be that your business becomes dependent on the public, if the public decides your business wasn’t worth the investment and take it away, the business will go into negative equality and eventually your business will be in debt.
Leasing something is the same as renting it. You pay the leasing every month for the use of the equipment. The contract made with the lessor lasts a number of years estimated between 2 and 10 depending weather the cost on it. This shows that you can have full us of the equipment without having to pay the full cost of the item in straight on go. Over the time of the lease, the leasing company will maintain the price of the item plus their charger which means you only need to deposit a small amount at the start of the lease. At the end of the lease you have a decision to choose if you want to carry in leasing at a low rate or to sell the product to another person or to another company.
An example to your business could be leasing vehicles, or office equipment. An advantage of leasing could be that leasing is inflation friendly. As the costs go up over five years you still pay the same rate as when you began the lease. Another advantage could be there is less upfront cash outlay which means you do not need to make large cash payments for the purchase of needed equipment. A disadvantage could be that you have a responsibility to continue making payments. You have no fairness until you decide to purchase the equipment at the end of the lease term, at which point the equipment may have criticised suggestively.
Factoring is a quick and easy way of turning your invoices into cash. Factoring can be described as it is selling your invoices to a factoring company. You also get cash quickly, and also don’t have to collect the debt however you may lose some of the value of the invoice. The factoring company gets the debt and has to collect it. They make a profit by paying you less cash than they actually value of the invoice. The disadvantage could be your ability to borrow from other sources may be reduced. Another advantage could be that if you were to end an arrangement with a factor you will have to pay off any money they have advanced you on invoices if the customer has not paid them yet. This may require some business planning. An advantage could be that the cash is released as soon as orders are invoiced and is available for capital investment and funding of your next orders. Another advantage could be that factors may give you useful information about the credit standing of your customers and they can help you to negotiate better terms with your suppliers.
* Overdraft facilities
Overdraft facility is when you are allowed to be overdrawn up to a certain amount without being charged or having to pay direct debits etc. however you maybe charge a small amount of interest if you use the facility. An advantage could be that it’s a convenience as you don’t have to worry about penalty fees if you temporarily don’t have enough money in your account. A disadvantage could be that there will be a lot of interest to pay, and being down below zero will make it hard to pay off. If the overdraft is unauthorised, there may be huge fees to pay each day, or with each new small transaction, there may be an 2nd, 3rd, 4th etc. full penalty fee for each transaction.
* Bank loan
A bank loan provides medium or long term finance. A bank loan is the most common form of loan capital for a business. The bank sets the fixed period over which the loan is given, the rate of interest and the timing and amount of repayments. The banks will usually require that the business offers some security for the loan, although in the case of a start-up this security often comes in the form of personal guarantees provided by the entrepreneur. Bank loans are good for financing investment in fixed assets. They are generally charged at a low rate of interest that a bank overdraft. The interest rate can be either fixed or variable. The advantage of getting a bank load could be that you can borrow large amounts of money. The disadvantage is that some loans carry a prepayment penalty, preventing the borrower from paying the note off early without incurring extra cost. Another disadvantage could be that Borrowing too much money can lead to decreased cash flow and payments can even overtake income in some cases; this is why many loan payments are limited to a certain percentage of a borrower’s income.
* Friends and family
Friends and family could help in your business for support such as giving you addition business funding. An advantage could be that asking family and friends can be quicker and cheaper to arrange and the interest of repayment terms may be more flexible than a bank loan. A disadvantage could be that conflicts could happen between them and relationship can break.
* Hire purchase
Hire purchase is about ownership. With a hire purchase agreement, after all the payments have been made, your business customer becomes the owner of the equipment. This ownership transfer either automatically or on payment of an option to purchase fee. For tax purposes, from the beginning of the agreement the business customer is treated as the owner of the equipment and so can claim capital allowances. Capital allowances can be a significant tax incentive for businesses to invest in new plant and machinery or to upgrade information systems. Under a hire purchase agreement, the business customer is normally responsible for maintenance of the equipment. An advantage of having hire purchase could be that you can have something you can’t afford. Another advantage could be that you can save your own business money. A disadvantage could be that if you miss the payments, you lose the item plus what you already paid. Another disadvantage could be that if you break the item, you still have to play for it as well as having a replace it.
* Reinvest profit
Reinvested profits are also known as retained profit or earnings. All the profits you earn in your business are put back into the business for its own use. For example expanding your business to gain more profits. An advantage could be that your business may have the flexibility to decide whether to use capital or borrowings to expand or improve. Another advantage could be that you could be building equity in your business and therefore increasing the value of the shares. A disadvantage could be that you may not have any other source of income outside of your business and may not be able to afford to reinvest a significant portion of their profits. Another disadvantage could be that your business only gets to retain earnings if it makes a profit. Retained earnings are profits after corporation tax and dividends are paid out. Sometimes it is better to run the company at breakeven and pay less tax.
* Own savings
Own savings can be defined as money set aside for the purpose of future use. Saving is usually representing only one part of an individual’s assets. An advantage could be that if you wanted to expand your business you decided how much you’d like to invest into your business but it is at your own risk. It also gives your business a financial improvement. A disadvantage could be that you’ll need more working capital than you think.
* Government grant
Government grant is where the government provides support to businesses both financially, in the form of grants, and through access to expert advice, information and services. Most government grants require you to match the funds you are being awarded. The grant covers a proportion of the money needed, while you supply the rest. You must also demonstrate that your business can provide its share of the total costs. An advantage of having government grant could be that they provide huge financial support and rewards with just one offer. Another advantage is that who receives government grant find it easier to increase money from other government and private sources. A disadvantages could be that Government grants often come out with a set of rules for who are eligible to apply that can be so specific that it excludes many businesses. And they tend to demand certain activities must be included in any project to be funded which may increase businesses expenses.
* Commercial mortgage
Commercial mortgage is the most popular type of mortgage used to buy buildings and land for business purposes. If you were going to have commercial mortgage rates and payment terms are negotiated in each loan by the borrower and the lender. Commercial mortgages have commitment fees and can be quite profitable for mortgage lenders, although there is some default risk. An advantage could they can give your business a large assets which is likely to increase in value. Another advantage could be that the loan repayments involved can be similar to your current rental costs so you won’t need to adjust your budgets which this depends on the mortgage. A disadvantage could be that when you sign a commercial mortgage contract you are committing to a period of 10 to 30 years. Also if you failed to make repayments on time you may have to pay additional interest.
I would advise you in your expansion to use possibly a bank loan, own savings, reinvest profits source of finance. I think you could use a bank loan due to if you can demonstrate your business can generate enough profits to proper and then pay them back then that’s a good option for you. Also the benefit could be that large amount cab be borrowed and also lower interest rates than overdrafts. Own savings could also be a good choice as I think you wouldn’t have to worry about financial problems as you already have them and you don’t have to worry about paying someone back. Reinvest is also a good option due to your using your own profits to expand your business and make it bigger then more customers are likely to come then you can gain more profits. Thank you