Managing Financial Resources and Decisions Assignment 1:
In this assignment I will identify the sources of finance that are available to MPD Ltd, and I will be assessing the implications of the different sources that are available to MPD Ltd. In addition, I will look at different sources of finance that will be appropriate for this business.
Sources of finance:
A mortgage is a loan secured on property that can be repaid in instalments over a period of time typically 25 years and this is a long term source of finance. MPD Ltd will need a mortgage of £6 million to purchase a building and then convert it into a shopping mall.
An overdraft is where the business is allowed to be overdrawn on its account and this also mean they can still write cheques, even if they do not have enough money in the account. However, this a short term source of finance. MPD Ltd currently has an overdraft of £400,000.
A loan is money borrowed at an agreed rate of interest over a set period of time; this is a medium or long term source of finance. MPD Ltd have been loaned £1,000,000 to use for funds.
Factoring involves outsourcing company’s invoicing arrangements to an external organisation. It also immediately allows the company to receive money based on the value of its outsourcing as well as to receive payment of future invoices more quickly. MPD Ltd uses factoring by entering negotiations with a factor.
Working capital is a short term money that is reserved for day to day expenses such as stationery, salaries, rent, bills and invoice payments. MPD Ltd has a working capital of £1,200,000 to pay the suppliers for stock and the wages of workers.
Debenture is a long term loan, with fixed or variable interest. Loans are usually secured against the asset being invested in, so the loan company will have a legal shared interest in the investment. MPD Ltd needs to purchase substantial manufacturing equipment which is an estimate of £1,700,000.
Equity shares are the source of the permanent capital. Since they do not have maturity date and equity shares also represent the ownership position in a company. MPD Ltd is an organisation that is owned by Billy Harriman who owns 90% of the company.
Implications of different sources of finance:
Financial implications of a loan:
The financial implication of a loan is the interest rate being charged (at a variable by which the company is overdrawn – in this case we call it an overdraft). Also the bank can change limit at any time or ask for money to be paid back sooner than expected. MPD LTD needs to ensure that money owed will have to be paid back in stated time or risk further financial problems in case of a default. In addition, loans are also less flexible than an overdraft. In my opinion, MPD LTD needs to take appropriate actions to pay the loan off as soon as possible to avoid high interest rates and possibly being in debt.
Legal implications of a loan:
The legal implication is that loans can only be used for its purpose and Billy Harriman in MPD Ltd who is lending the money to a company can place a charge on the organisation assets as a form of security. If the loan is not paid, the company is at risk of losing their assets as stated in the loan agreement.
Control implications of a loan:
Control implication of a loan is that the lender can insist on having a staff member to overseas the use of the loan so there are not any discrepancies. However, the bank will often require a security for the loan. For example, on the insolvency of the borrower the bank can take possession of that asset, sell it and use the proceeds to repay the loan.
Bankruptcy implications of a loan
If the company...
References: Business Essentials (Managing financial resources and decisions)
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