HBM - Sources of Finance

HBM - Sources of Finance

• Overdraft from bank (interest is paid on the amount overdrawn).​

• Debt factoring – passing debts to another company for less than the full amount. Avoids cash flow problems.​

• Trade Credit – buying now and paying later.

All are temporary. They can be used to  see the company through a brief period when there might be ​

a cash flow problem. These methods are all expensive and if extensive use will only lead to greater losses.

Dropdown

​

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from bank (interest is paid on the amount overdrawn).​

​

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– passing debts to another company for less than the full amount. Avoids cash flow problems.​

​

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– buying now and paying later.



All are​

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. They can be used to  see the ​

company through a ​ brief period when there might be ​

a cash flow problem. These methods are all ​

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​and if extensive use will only lead to greater losses.

Multiple Choice

A bank overdraft is...

• Expensive as a high rate of daily interest is charged

• Difficult to arrange, not quick to arrange

• Usually available for more sums of money than a bank loan

• A long term source of finance

Fill in the Blank

Debt factoring is a ? term source of finance where firms sell their invoices to a factor such as a bank. They do this for some cash right away, rather than waiting 28 days to be paid the full amount.

Multiple Choice

Advantage of debt factoring:

• Time and effort is saved as the company is no longer required to recover unpaid debts

• Money is lost from the business as unpaid debts are sold at a reduced value

• Loan can be repaid over a long period of time

• Cheap as a high rate of daily interest is charged

• Cash flow will not be improved by advanced payment of debts

Multiple Select

Which of the following are TRUE of debt factoring?

• Time and effort is saved

• May be difficult or may take time to sell the assets

• Expensive as a high rate of daily interest is charged

• debts are sold at a reduced value

• Can be repaid over a long period of time

Multiple Choice

Trade credit:

• means discount for prompt payment is lost

• does not help cash flow

• allows shareholders to receive a dividend

• is when a business sells unpaid customer invoices

Multiple Select

Which of the following are TRUE of retained profit?

• Does not need to be repaid

• May be difficult or may take time to sell the assets

• Expensive as a high rate of daily interest is charged

• For profits to build up to use in this way can take too long

• Can be repaid over a long period of time

Multiple Select

Which of the following are TRUE of sale of assets?

• Does not need to be repaid

• May be difficult or may take time to sell the assets

• Expensive as a high rate of daily interest is charged

• must meet certain criteria

• Can be repaid over a long period of time

Multiple Select

Which of the following are TRUE of share issue?

• Does not need to be repaid

• May be difficult or may take time to sell the assets

• Large amounts of finance can be raised

• Shareholders need to be paid a dividend each year

• Can be repaid over a long period of time

Multiple Select

Which of the following are TRUE of a bank loan?

• Interest has to be paid

• May be difficult or may take time to sell the assets

• Large amounts of finance can be raised

• Can be arranged quickly

• Can be repaid over a long period of time

Multiple Select

Which of the following are TRUE of a commercial mortgage?

• Does not need to be repaid

• May be difficult or may take time to sell the assets

• Expensive as a high rate of daily interest is charged

• For profits to build up to use in this way can take too long

• Can be repaid over a long period of time

Multiple Select

Which of the following are TRUE of grants?

• Does not need to be paid back

• May be difficult or may take time to sell the assets

• Expensive as a high rate of daily interest is charged

• Business needs to meet certain criteria

• It is time-consuming to apply for

Multiple Select

Which of the following are TRUE of debentures?

• Control of the business is not lost

• May be difficult or may take time to sell the assets

• Expensive as a high rate of daily interest is charged

• For profits to build up to use in this way can take too long

• Interest must be paid even if the company makes a loss

Multiple Select

Which of the following are TRUE of venture capital?

• Control of the business is not lost

• Available for more risky investment

• Expensive as a high rate of daily interest is charged

• A larger return may be required due to the high risk nature of the investment

• Often used as banks will not offer business a loan due to risk

Multiple Select

Which of the following are TRUE of crowd funding?

• Access to large amount of investors

• A public request for investment risks your project being copied by competitors

• Fast way to raise finance

• Business needs to meet certain criteria

• Interest must be paid

Leasing

• A way of renting an asset that the business requires, such as a coffee machine.

• Monthly payments are made and the leasing company is responsible for the provision and upkeep of the leased item.

Hire purchase

• Used to purchase an asset, such as a delivery van or piece of equipment.

• A deposit is paid and the remaining amount for the asset is paid in monthly instalments over a set period of time.

• The business does not own the item until all payments are made.

Categorize

Options (7)

renting an asset

purchase an asset

monthly rental payments

leasing company is responsible for maintenance

initial deposit required

ownership transfer at end of term

option to buy at end of term

Leasing vs Hire Purchase

Leasing

Hire Purchase

Source of Finance - Scenarios

Match

Match the following

• A renewable energy company needs £2 million to develop a new wind farm and is looking for a long-term funding source without immediate repayment pressure.

• A local bakery wants shop in an area that the government is trying to develop. They require £50,000 for renovations.

• An independent video game developer needs £75,000 to fund the final development stages and attract potential customers before launch.

• A medium-sized construction company needs £500,000 to replace outdated machinery. They do not want to take on debt and have some surplus funds available.

• A retail business is waiting on £50,000 in outstanding invoices but needs to pay suppliers immediately.

Debentures

Government Grant

Crowdfunding

Retained Profit

Debt Factoring

• Debentures

• Government Grant

• Crowdfunding

• Retained Profit

• Debt Factoring

Match

Match the following

• A law firm owns a large office building but no longer uses an entire floor. They need £100,000 for rebranding and digital marketing.

• A well-established corporation wants to raise £10 million to expand internationally without taking on debt.

• A family-owned café wants to borrow £30,000 to refurbish its premises but prefers a structured repayment plan over a long period.

• A manufacturing company wants to expand its factory to meet increasing demand. The cost of the expansion is £1.5 million, and the business wants a long-term source of finance without giving up control.

• A small technology startup has developed a new product but needs £200,000 to fund manufacturing and marketing. They are open to external investors who can provide business expertise.

Sale of Assets

Share Issue

Bank Loan

Commercial Mortgage

Venture Capital

• Sale of Assets

• Share Issue

• Bank Loan

• Commercial Mortgage

• Venture Capital

Multiple Choice

Which factor affecting source of finance chosen?

If this is quick then I pay less money on the amount I borrowed.

• Short term

• Long term

• Interest rates

• Payback term

• Size & Type of Organisation

Multiple Choice

Which factor affecting source of finance chosen?

I need to pay my supplier now, I don't have the cash in business to pay this.

• Short term

• Long term

• Interest rates

• Payback term

• Size & Type of Organisation

Multiple Choice

Which factor affecting source of finance chosen?

I am need to try and keep the cost of the finance as low as possible.

• Short term

• Long term

• Interest rates

• Payback term

• Size & Type of Organisation

Multiple Choice

Which factor affecting source of finance chosen?

A mortgage would be suitable for me due to this reason.

• Short term

• Long term

• Interest rates

• Payback term

• Size & Type of Organisation

Multiple Choice

Which factor affecting source of finance chosen?

I am a public sector business so I cannot sell shares to raise finance.

• Short term

• Long term

• Interest rates

• Payback term

• Size & Type of Organisation