- Identify the short term and long term sources of finance where suitable, for each scenario. Give at least two-three options in each scenario.
- Assess the implications & costs of each source including the relative advantages and disadvantages to the business.
- Advice on the appropriate source of finance for each scenario giving valid justification, why you think it is the most suitable source in each case.
Two friends, Alan & Tim just graduated from the college. They plan to start their own business, of selling health foods for office workers. They have identified a commercial complex as their venue. The Franchise with establishment cost & working capital for the first six months of operation, would require an investment of ? 400,000.
A transportation company requires to add two new buses to their fleet of vehicles, with the increasing demand for transportation for the businesses in the construction industry. This company is a medium-sized company, with a good reputation in the market for the services it provides. They had commenced their business since the past four years. They have been operating efficiently making consistent net profits at the rate of 15% per annum since they commenced operations. The cost of the buses amounts to ? 225,000.
- Since Alan & Tim have graduated from the college:
- Short term and long term sources of finance:
- The first source of finance is the personal sources of both the persons including friends and family.
- The second source of finance is bank loans.
Implications and costs of each:
The first sources are recommended because the franchisee selling health food will be a partnership. At the inception it is not clear what the profits of the franchise will be. The advantage of personal sources is that there will not be a pressure to repay the money on the business and the business will be able to establish itself. The disadvantage of personal sources is that each graduate may not be able to raise $200,000 from personal sources.
The second source is a loan from the bank. The advantage of this source is that the personal resources of the persons will not be strained. Also, the bank will give them full control over the franchise and there will be no interference. The disadvantages are that regular interest and ...
The response provides you a structured explanation of financial sources appropriate for a business. It also gives you the relevant references.