Task 1: Fill in the name of the missing source of finance in the table below:
Source of Finance | Advantages | Disadvantages |
1. | – Avoids interest payments. | – Funds available are likely to be limited. |
– May help attract funds from others. | – May result in personal assets (such as property) being put at risk. | |
2. | – Avoids interest payments. | – Asset no longer available to the business. |
– Can prevent loss of control. | – May involve ongoing payments if sale and leaseback occurs. | |
3. | – A ‘free’ source of finance with no interest charges. | – Shareholders may wish to receive the profits. |
– No potential loss of control by the business owners. | – Business may lose out on valuable alternative investments. | |
4. | – Can raise very large amounts of capital. | – Only available to companies. |
– No commitment to fixed interest payments. | – Private limited companies need shareholder approval for additional shares. | |
– Existing owners may lose control of the company. | ||
5. | – Can be negotiated to meet specific requirements. | – Inflexible and interest may be charged on unused funds. |
– Managers can plan for repayments within budgets. | – Collateral may be required. | |
6. | – Ideal for long-term projects. | – Managers may need to offer property as collateral. |
– Avoids owners losing control of the business. | – Businesses may pay high interest on long-term loans. | |
7. | – Flexible funding for day-to-day financial requirements. | – High interest rates. |
– Interest payable only on the amount borrowed. | – Bank may ask for repayment at any time. | |
– May not be available to some SMEs. | ||
8. | – Avoids bureaucratic banks. | – Unfamiliar source of finance for many managers. |
– Interest rates may be lower than bank loans/mortgages. | – Unsuitable for raising very large amounts of capital. | |
9. | – Allows for updates to capital regularly | – Business never owns the asset. |
– Avoids need for major capital expenditure. | – May involve higher payments than purchasing the assets outright. | |
10. | – Only source of finance for low-income individuals/businesses. | – Relatively small sums of finance available. |
– Costs of borrowing lower than banks. | ||
11. | – Expertise brought into the business as part of the deal. | – Entrepreneurs may not want external involvement in decision-making. |
– No interest payments on the full amount of finance. | – Typically raises only small amounts of finance. |
Task 2: For each scenario, recommend a source of finance and justify why you have chosen it given the context
Scenario 1: Expanding a Local Bakery
A family-owned bakery wants to open a second location in a neighboring town. They need $50,000 to renovate the new space and purchase equipment. The owners want to avoid losing control of their business but need the funds quickly. What would be the most appropriate source of finance?
Source of Finance:
Why?
Scenario 2: Launching a Tech Startup
A recent college graduate has developed an innovative app and wants to start a company to market it. They need $200,000 to develop the app and cover marketing expenses but have no substantial assets for collateral. The business is high-risk, but the potential returns are significant. What source of finance should they choose?
Source of Finance:
Why?
Scenario 3: Seasonal Inventory for a Retail Shop
A small retail store needs $10,000 to purchase additional inventory for the upcoming holiday season. They anticipate selling the stock quickly but require short-term funding to cover the upfront cost. What is the best source of finance?
Source of Finance:
Why?
Scenario 4: Purchasing a Delivery Van
A flower delivery service wants to purchase a new delivery van worth $25,000. They have limited retained profits and want to maintain cash flow for daily operations. The van will be used for at least five years. What source of finance should they consider?
Source of Finance:
Why?
Scenario 5: Does loyalty pay off?
A boutique organic skincare company is introducing a new product line. They need $30,000 to cover production costs and are considering using their loyal customer base to raise funds. The company also wants to promote the new product during the funding process. What is the most suitable source of finance?
Source of Finance:
Why?
Scenario 6: Building a Manufacturing Facility
An established furniture company plans to construct a $5 million manufacturing facility to meet increased demand. They want to avoid high-interest payments and need a long-term solution. What source of finance should they pursue
Source of Finance:
Why?
Scenario 7: Addressing a Cash Flow Shortage
A medium-sized construction firm is experiencing a temporary cash flow issue due to delays in client payments. They need $100,000 to cover wages and operational expenses for the next three months. What is the most appropriate source of finance?
Source of Finance:
Why?
Scenario 8: Developing an Eco-Friendly Product Line
A clothing brand wants to launch an eco-friendly product line, requiring $75,000 to purchase sustainable materials and upgrade their equipment. They aim to secure funds without incurring significant interest but are open to external investment. What source of finance should they consider?
Source of Finance:
Why?
Task 3: 10-marker with a twist
Read the case study below and consider how you would answer the 10-mark question. Here is the twist though…
You will need to answer the question in small groups but not with the pen! Instead, you and your partners need to make a short film which both answers the question, showcases your cinematic prowess, and highlights your knowledge and understanding of BM theory. Let your creative juices flow!
Case Study: GreenEarth Technologies
GreenEarth Technologies (GET) is a company specializing in the development and production of eco-friendly home appliances. Established in 2015, the company has positioned itself as a pioneer in the sustainable home appliance industry. Their product range includes energy-efficient washing machines, solar-powered air conditioning units, and water-saving dishwashers.
GET’s target audience consists of environmentally conscious consumers who prioritize sustainability and energy efficiency when purchasing home appliances. The company’s mission is to reduce the environmental impact of home appliances while offering innovative and high-quality products to its customers.
Despite a strong presence in the local market, GET has ambitious plans for international expansion. The company aims to establish manufacturing facilities in various countries, develop strategic partnerships with international distributors, and create targeted marketing campaigns to reach a global audience.
To finance its expansion plans, GET has two options:
Option 1: Issue shares through an initial public offering (IPO) GET can go public by issuing shares on a stock exchange, raising capital from a large pool of investors. This option would provide the company with immediate funds for expansion and increased visibility in the market.
Option 2: Secure a long-term loan from a bank Alternatively, GET could secure a long-term loan from a bank or other financial institution. This option would allow the company to borrow the necessary funds while maintaining full control over its operations and ownership.