Managing Financial Resources and Decisions

Topics: Finance, Debt, Loan Pages: 5 (1264 words) Published: June 12, 2013
Assessment Brief
Unit 2
Managing Financial Resources and Decisions
P.1.Identify short term, medium term and long term sources of finance available to Blue Orange Solutions. Long Term
✓ Loans
✓ Debentures
✓ Bank loans (mortgage)
✓ Merchant or Investment Banks
Short / Medium Term
✓ Bank loans
✓ Overdraft facilities
✓ Trade credit
✓ Leasing
1. Business Angels
✓ Small sums (500K)
✓ Expertise
✓ Longer term involvement
✓ High growth businesses
(www.bized.co.uk on Mon, 24/05/2004 - 12:00)
For Blue Orange Solutions are available next sources of finance for business growth: o Venture Capital in that case Mujtaba can loose control of 50% of his company Advantage
Disadvantage
o Bank loans
Advantage
Disadvantage
P2)Assess the implication of different sources finance (e.g.- equity financing and debt financing) for Blue Orange Solutions including their relative advantages and disadvantages (Guidance- example of impact category- financial, legal, dilution of control, and bankruptcy)

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...
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