Managing Financial Resources and Decisions Essay
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1. Equity capital (owners capital) for Blue Orange Solutions Equity is an external source of funds available to business and these are generated from the shareholders/investors. This is considered as the safest source of start-up funds. In case of a private limited company, the amounts are invested by the shareholders who are known to each other. But in case of a public limited company, the amounts can be invested by general public or institutional investors. – The funding is committed to business as the investors can only realise their investment if the business is doing well, e.
g. through stock market flotation or a sale to new investors. – No financing costs involved as the business will not have to keep up with costs of servicing bank loans or debt finance, allowing to use the capital for business activities. – Outside investors can bring valuable skills, contacts and experience to your business. They can also assist with strategy and key decision making. – Investors are often prepared to provide follow-up funding as the business grows. The principal disadvantages of equity finance are:
– Raising equity finance is demanding, costly and time consuming, and may take management focus away from the core business activities. – Potential investors will seek comprehensive background information on the business. – Depending on the investor, original investors will lose a certain amount of power to make management decisions. – There can be legal and regulatory issues to comply with when raising finance, e.g. when promoting investments.
2. Bank loan for Blue Orange Solutions A debt financing obligation issued by a bank or similar financial institution to a company or individual that holds legal claim to the borrower’s assets above all other debt obligations. The loan is considered senior to all other claims against the borrower, which means that in the event of a bankruptcy the bank loan is the first to be repaid, before all other interested parties receive repayment. Bank loans are usually secured via a lien against the assets of the borrower. At the time the loan is made, there typically tend to be no other existing liens on the borrower’s assets, or at least not on any of the assets being secured by the bank loan.
Advantages: – A bank loan can be used in a number of ways; money can be borrowed for many large-ticket items – A bank loan can be secured in a specific time frame Disadvantages: – Some loans carry a prepayment penalty, high penalty rates, other finance charges – There are a number of limitations on the transaction – Borrowing too much money can lead to decreased cash flow and payments can even overtake income in some cases.
3. Bank overdraft for Blue Orange Solutions An overdraft is a temporary facility added to business’s bank accounts which allows the account to be overdrawn by a certain amount. The business is charged interest based on the amount overdrawn and the length of time overdrawn, and are usually charged a regular fee for the use of the facility. An overdraft is particularly useful when business has regular sales and purchases and is to finance temporary cash shortages. They are a good backup to ensure business can pay its bills. An overdraft is not supposed to be a permanent source of finance.
Advantages of Overdrafts Flexible – An overdraft is available when business needs it and costs very small amount of charges. It allows business to make essential payments in case of cash shortages. Quick – Overdrafts are easy and quick to arrange, providing a good cash flow backup with the minimum of fuss.
Disadvantages of Overdrafts Cost – Overdrafts carry interest and fees; often at much higher rates than loans. The business face large charges if you go over the agreed overdraft limit. Recall – Unless specified in the terms and conditions, the bank can recall the entire overdraft at any time. Security – Overdrafts may need to be secured against business assets, which put them at risk if payments cannot be made.
Business Angels for Blue Orange Solutions Business angels are wealthy individuals who invest in start-up and growth businesses in return for equity in the company, they are also called informal investors. The investment can involve both time and money, depending upon the investor. Business angels can operate independently, but many work as a syndicate (a group of individuals or organizations combined to promote some common interest). Business angels typically invest £500,000 in a company. On average, business angels in the UK invest £42,000, and each investor makes around six investments.
Where larger amounts are invested in a business, this usually takes place through a syndicate of angels organised through the entrepreneur’s personal contacts or a business angel network. As well as cash, business angels can offer years of experience in the business world, not to mention useful contacts to help you grow your business, which can add real value to your company. Although some prefer to become a sleeping partner, others will get actively involved in business, offering help with anything from writing a marketing plan to taking the company through a flotation on the stock market. Indeed, the BBAA / NESTA report recommends that angels invest in their area of expertise and stay connected with the business, preferably at board level, as a way of improving the success rate of angel deals.
Venture Capital for Blue Orange Solutions A venture capital firm is a group of investors who gain income from wealthy people who want to grow their wealth. They take this money and use it to invest in more risky businesses than a traditional bank is willing to take on. Because the investments are risky, the venture capital firm typically expects a higher return on the businesses it is investing in than other types of lenders would. The interest rate or higher cost of capital is worth it to the business, however, because the business would otherwise not receive the financing needed.
Venture capital firms work under a specific investment profile. The investment profile is a document that outlines the types of businesses the firm is willing to invest in. By targeting their investments to certain types of businesses only, the venture capital firm can learn the ropes of a particular industry, and thus be better prepared to decide which new or expanding businesses are the best investments. And venture capital firms do not just provide start up financing. They can also provide expansion financing for promising businesses. When individual investors entrust their money to a venture capital firm, the firm puts the money in a fund. This fund is then invested in several companies, with the expectation that the companies will be able to repay the money in around three to seven years.