Task 2: Assessing the sources available to the businesses (a critical analysis of short term, midterm and long term financing) Finance is the bloodline of any business, and firms must try to tap every possible source of funds available. These sources can be either available externally or internally, as a Financial Manager the key is to explore these opportunities and exploit them. In our case study for BOATLINE Limited, various businesses finance available can be broadly classified into: a.) Internal Sources.
b.) External Sources.
Internal sources can be where we don’t require agreements beyond the firm’s director. These sources can be: * Reduced Inventory Levels.
* Delayed Payments to Trade Payables
* Tighter Credit Control
* Retained Profits
Internal sources have an advantage that they are flexible. They may also be obtained quickly, especially from the working capital sources and do not need compliance of other parties. For publically listed companies, shareholders (tax paying) might want their companies to retain their profits instead of reimbursing to the shareholders as dividends. Retaining profits would also allow some breathing space for the firm as they would have enough cash to pay their current liabilities if needed. Another sources like tighter credit control, reducing inventory levels and delaying payments to the creditors. EXTERNAL SOURCES
External sources can be classified into following categories: * Long Term Business Financing
* Midterm Business Financing
* Short Term Business Financing
Long Term Financing
A company like BOATLINE Limited having substantial balances can go public through National Stock Exchanges (LSE) or Alternative Investments Markets (AIM). Long term financing is when a company raises funds whose payback period is minimum 5 years or more. Various ways of raising funds are: Shares:
* Ordinary Shares (ordinary shares and are entitled to voting rights) * Preference Shares (guaranteed dividends but no voting rights) * New Shares issue
* Rights Issue
* Bonus or Scrip Issue
* Bank Loans
* Investment Banks
However for a small company like BOATLINE Limited there can be advantage and disadvantages of Equity Financing. Advantages of Long Term Financing:
* There are no fixed charges linked with the issue of ordinary shares. * It is not necessary for the firm to pay quarterly/annually dividends. * Issue of shares are not linked with any maturity date. * Shares can be easily sold in the market as they provide hedge against inflation. Disadvantage of Long Term Financing:
* Long term financing and issuing shares are a very expensive exercise for a company. The cost of underwriting is very high * Every time new shares are introduces the ownership of previous shares gets diluted as the net profit would be divided to more people. * Most of the shareholders expect dividends and if company doesn’t provides it leads to fall in share prices and net loss in market capitalisation of the company. Short Term Financing
To finance the immediate need of maintaining the stock levels normally companies prefer the short term financing. Short term financing typically includes: * Trade Credit
* Short Term Bank loan and Overdraft
* Debt Factoring
Trade credit among all other short term financing is one of the easiest and cheapest ways of financing. The stock may be purchased now but payment can be made after 30-90 days. In a period of high inflation like now, this clearly reflects its advantages over other financing methods. Short term bank loans and overdrafts are yet other easier methods of raising funds. Overdrafts are cheaper as compared to other loans and can immediately meet the financing needs of the company. Debt factoring is one of the short term financing which includes a financial transaction whereby a business job sells its accounts...
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