Evaluating sources of Finance - Seminar 1
- 1. Principles of Business Introduction to Finance – Seminar 1: Evaluating sources of finance
- 2. Learning outcomes By the end of this session you should be able to: 2 • Explain the importance of cash to a business • Compare and contrast debt and equity • Evaluate financing options for different types of organisation • Understand the difference between cash and profit
- 3. Review of pre-seminar work Seminar 1: Evaluating sources of financing - Read chapter 1 and 15 of core text book (Atrill & McClaney). Attempt the questions at the end of these chapters. - Research realistic sources of finance, and costs, for a brand new start up business 3
- 4. Review of pre-seminar work Seminar 1: Evaluating sources of financing Debt vs Equity 4
- 5. Task 1 For your chosen business, estimate the initial costs that you will need to set up before you start trading. Consider (amongst other costs): - 5 • Rent • Legal costs (It costs approximately £100 - £300 to set up a new company) • Inventory • Equipment needed • Your expenses/remuneration • Any other staff costs • Licenses etc • Marketing
- 6. Task 1 What figure did you come up with? - According to the money lender Borro (2012) the average start up cost for a micro business in the UK was just over £41,000. - Those considering loan finance had significantly higher start up costs - Did you consider contingencies? Start-up costs for a restaurant https://www.youtube.com/watch?v=QWZQRU0yZ5U 6
- 7. In pairs, person A will take on the role of a bank manager who is deciding whether or not to lend £40,000 to person B. Person B will take on the role of a potential investor, who has up to £40,000 to invest in business A. 1. Write down the questions that you would want to ask the other person before you make a decision about whether or not to lend or invest money to the other person. 2. Each spend 5 minutes going through your questions with your partner. 3. Afterwards, compare and contrast together the information that you decided you would need to make a decision about whether to lend or invest. 7 Task 2
- 8. 8 Typical questions • What are you cash flow, cost and revenue projections for the next 36 months? How do you know these are realistic? • Have you run a business before? • How much of your own money are you prepared to put into this business • What market research have you carried out? • How will you structure your business? • What is your contingency plan? Lenders specifically: • What assets are you prepared to use as security? • How long do you need the loan for? • What is your projected interest cover Investors specifically: • How much do you value your business and how can you justify this? • How quickly will I receive my required return on investment?
- 9. 1. Using the concepts of risk and return, explain by equity financing is usually more expensive than debt financing for a business 9 Task 3 2. What is crowdfunding? Evaluate this form of financing for a small business
- 10. 1. Risk versus return 10 Task 3 debrief 2. https://www.crowdcube.com/pg/crowdcube-inc-about-us-1
- 11. 11 End of seminar
Editor's Notes
- #5: Go through the characteristics of each with the students Cover the example of redeemable preference shares (debt as they need to be repaid) and irredeeemable preference shares (equity as no repayment requirement)
- #6: 10 minutes for them to brainstorm on this
- #7: 10 minutes for them to brainstorm on this
- #8: 45 mins
- #9: 45 mins
- #11: Equity is generally regarded as riskier, therefore investors will seek assurances of a higher return such as dividends or high capital growth Debt costs are usually reflected by coupon (interest) rate. Riskier companies/countries will need to offer a higher rate of return or interest rate to attract lenders. Similarly, if money is going to be tied up for a longer period then a higher interest rate will need to be offered. Also, uncertainty leads to higher risk and therefore cost for a business. This is why overdrafts are so expensive! Go through crowdcube with students. Benefits – open to a wider range of investors and allows members of public to contribute part of the funding requirement. Drawbacks – can take longer to raise required finance, and greater risk that required amount may not be raised.