FINANCIAL DECISIONS

Managing Financial Resources and Decisions

Managing Financial Resources and Decisions

Task1

1.1: Identify what sources of finance are available for a new business? (P1)

Sources of Finance

On a simple note, a start up business may choose among the following internal and external sources to finance the initial trading years of the business (Barclays, 2009, p. 1):

An informal loan from friend or family and personal savings - It is the most common source of finance for a start up business. Personal savings and family support may become the seed capital for a new business. Moreover, good relationship with friends and relatives may provide financial support in the form of loan or a friend's investment in the new business.

A Private Equity Investor - This financial aid is provided by the third party in exchange of certain portion of business ownership. For instance, a private investor (business angles) or a venture capitalist may invest in a new business, which is not limited to an entity holding partnership or sole proprietorship legal status.

Local Authorities - A new business may acquire financial support funds in the form of loans and grants, from the department of economic development at the local level.

Banking Institutions - Bank is most sorted after source of financer for a start up business because it offers a varied range of financial products including credit cards, overdrafts, and loans.

Commercial Service - A newly started business might be financed through commercial services including factoring and invoicing discounting and asset financing.

Government Funding Sources - There is a certain proportion of government budget dedicated to initiatives that can assist business in the field of R&D, start up, exporting and technology. These funding sources are offered in the shape of grants and early growth funds.

Business Support Organization - On a local level, there are various organizations that support fresh and expanding businesses through varied schemes, such as training, financial aid, and advice on business planning. These organizations may include The Prince's Scottish Youth Business Trust, charitable organizations, enterprise agencies, and the Prince's Trust.

Regional Development Agency - On a regional level, few agencies are responsible for creating and regenerating the business development strategy. Start up businesses may approach these regional agencies for business funding and support.

1.2: Assess the implications of the different sources by considering the following 3 implication: (P2)

Tax Effects

Taxation may have varied implications for the identified sources of finance to be used by a start up business. In case of an informal loan and personal savings, tax will be applicable on both the parties if they agree upon interest payments. A Private equity investor promotes capital structure that can maximize the post tax return of an investment.

Support from Local Authorities is tax deductable and in benefit to the start up business. It may provide a low cost offer to finance a new business. Bank borrowing is tax deductable and allows the start up business to pay reduced amount of tax on the operating income.

Commercial Service involves the leasing or hire purchase method of financing business assets and hence ...