Sources of Funds to Finance a Business Plan
A business plan is an essential instrument for a business when new strategies and objectives are established. In this case Andy Rexford is working on increasing the business growth and therefore a business plan is prepared for this objective. Various sectors of the business will be involved, including the labor force department, finance department, marketing department and the operational sector. An objective of increasing growth is mostly influenced by the availability of funds. Without finances, growth cannot be achieved and a significant growth cannot be fully supported by the funds generated by the business. For this reason, businesses find other sources of funds to finance growth.
A business is required to take into consideration various factors before deciding what source of finance to use. These factors include how much finance is needed, what use the funds will be put into, the financial position of the business, the importance of the finance to the business and the availability of the funds. Sources of finance can be classified into two types according to the source or term allowed to repay the fund. When classified according to sources, then we can have internal sources and external sources. If classified according to the term allowed to repay the funds, we have the short term and long term funds.
Internal sources are those funds that are generated within the business. They include profits earned from the business operations, revenues from the company’s asset and the company’s savings which have not been used for investment. Working capital can also be termed as an internal capital for a business as it is used to undertake the day to day activities of the company. The advantage of using the internal source of finance is that the business will not be under any obligation to repay the funds and it will also not be exposed to interest payment. The disadvantage of this source of capital is that the company will have less capital as it will have restricted itself only to its personal sources. For this reason, less growth can be implemented with the funds.
The external sources include ownership and non ownership capital. Ownership capital is raised from the shareholders who are the owners of the business. This is through the issue of shares which can be ordinary shares or preference shares. Ordinary shares give the holders the right to ownership and also the right to vote. On the other hand, the preference shares have a fixed dividend payment and do not give the holder the right to vote. According to , a company listed in the stock exchange can use the right issue or the deferred ordinary shares to raise funds. The advantage of this source of finance is that the company is able to raise a lot of capital that can be used in large obligations such as expansion of the business or setting up a new branch. Its disadvantage is that it takes a long time to raise the funds as it involves a lot of legal procedures.
Non ownership capital is raised from other sources which do not involve ownership such as banks and creditors. Banks offer loans whose payments are fixed within a prescribed period and are inclusive of interest. Loans can either be short term or long term depending on the time allowed to repay. Short term loans are repaid within a period of one year while long term loans are repaid within a period of more than one year. Overdrafts are also given by the banks as a form of short term fund. Hire purchase enables the company to acquire assets without immediate payment. The advantage of this source of finance is that it is reliable and does not take a long time to raise the funds. The disadvantage is that interest must be included in payment.
I would advice Andy Rexford to use the external source of finance and especially long term loan from the banks. This is because it is a private company and therefore cannot raise enough funds from the members. Bank loans are also reliable and can be raised within a short period. Andy Rexford has a good financial position and therefore will not have difficulty in accessing the loan.
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