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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:
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• 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):
-
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• 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.
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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
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)
10 minutes for them to brainstorm on this
10 minutes for them to brainstorm on this
45 mins
45 mins
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.
