Sources of finance for growth and the possible relevance of various financial transactions, such as spot and forward foreign exchange dealings, currency options, financial futures and securities. When expanding a business, it’s important the entrepreneur decides the best time to do so in order to be successful. Firstly, the most important factor to consider when expanding is if the business is profitable; the business should only consider expanding if they have been making profits over a period of time. Secondly, the business will need to do detailed market research.
It’s important for the business to complete research as it will tell them if expanding will be reasonable; perhaps their products are at a high demand which would encourage the expansion. Furthermore, research will also show them the state of the economy. It is better to expand in a boom period as people have more disposable income which means there will be a demand in the products leading to a higher chance in your products being purchased. The business should also consider the nature of the product, is it a need in respectable to the state of the economy.
After the entrepreneur has decided the best time, you will need to know how to expand. You could change the legal structure or type of ownership. For example, expand from a sole trader to a partnership, from a partnership to a private limited company, to a private limited to a public limited company, to a public limited to a franchise. However, in order for a business to become a company two very important documents need to be completed; articles of association and memorandum of association. Once completed they need to be submitted in Companies house in Cardiff, if they are in order they will issue a Certificate of Incorporation.
Then the business can issue shares to obtain money; a company’s first offer of shares on the stock market is called flotation. Capitalisation is the market value of the listed company, equal to the product of the number of its shares and their price. There are four types of shares investors can buy in a public limited company and the entrepreneur needs to be aware of. First there are ordinary shares. These are the cheapest shares and standard shares with no rights or restitution to get a good return on investment. This type of share has the highest risk because they will be the last to be paid if the company closes.
Then there are preference shares. These shares have the right to give the holder preferential treatment when annual dividends are distributed to shareholders. They are also guaranteed a fixed dividend every year. Furthermore, there are cumulative shares. If the holder cannot be paid pone year it will be carried forward to successful years. The last type of share are redeemable shares. These shares allow the company to buy up the shares from the holder at a future date. Moreover, another way to expand is to set up in another market. The business could operate in a local, regional, national or global area.
For instance, Tesco expanded to America. However, they were unsuccessful and returned to a national market. It is important for the business, if expanding in a different market to stop if the business is unsuccessful (like Tesco) to avoid extra losses. Lastly, the business could also merge with other businesses or have an acquisition. An acquisition is the process of obtaining a company to build on strengths or weaknesses of the acquiring company. A merger is similar to an acquisition but refers to combining all of the interests of both companies into a stronger single company.
When expanding there are many places to go for advice to ensure success. The first place to go for advice is an investment bank. An investment bank is a financial institution that provides a variety of services for clients. An investment bank can assist in mergers and acquisitions. Therefore, if you were to merge you would make use of an investment bank and they will provide lots of helpful advice. In general, an investment bank's clients are institutional investors, but high net-worth individuals also use them. Another place to go for advice is a finance house.
Finance houses are a financial institution that lends money to people or businesses, so that they can buy things such as cars or machinery. Finance companies are often part of commercial banks, but operate independently. Or you can gain advice from mentors. Mentors are experienced individuals who can give you advice and guidance. In addition, you can get advice from the three different types of FTSE. FTSE stands for financial time’s stock exchange. If a business is considering expansion they can make use of FTSE to see what company to invest in.
FTSE 100 index is an index of the share prices of the 100 largest companies. FTSE 250 index is an index of medium-capitalized companies not included in the FTSE 100 Index. It starts from the 101st to the 350th company listed on the London Stock Exchange. Lastly, there is FTSE 350 index which is a market capitalisation weighted stock market index incorporating the largest 350 companies by capitalisation which have their primary listing on the London Stock Exchange. Another way to expand is to use public equity.
This is capital raised from the owners that can be invested in a public limited company. This money could also me collected by shareholders; they can make use of share capital to buy shares in other companies. Lastly, a business could take over another company. A takeover is when you acquire Acquiring control of a corporation, called a target, by stock purchase or exchange. When expanding, you will need money to do so. Financial for growth can however, have an element of risk to them. The first way to gain finance is investment of retained profit, this is money from previous profit.
This is good to use as you don’t have to pay it back with interest. However, if you use all the money up you won’t have any money in case of an emergency. Another way is by asset restructuring. This is when you expand buy restructuring your assets by using sale and leaseback (selling fixed assets and then lease them back). This is a good way to gain finance because sale and leaseback companies are responsible for any repairs or replacements. Also you could use equities. This is when you raise money from external investors in return for giving a share of your business.
Using this means you get the money, but you have to give up a percentage of the company. Moreover, you could use corporate bonds. These are used by companies to raise funding for large projects. For example, business expansion or takeovers. A negative of using this is that you have to pay back with interest. Additionally, you could get a commercial mortgage. This is a loan you get from the bank to buy a premises, they are long term and usually last 15 to 30 years. However, if you don’t meet repayments the property can be repossessed.
A loan is another way to gain finance. A loan is money borrowed from the bank which is repayable over a set period of time. This money has to be paid back with fixed interest which can be a risk. Similarly, you could make use of an overdraft. This is a short term loan which allows you to withdraw more money than you have in your bank. Alike to a loan you have to pay it back with interest. Private equity is another way to gain finance. This is where investors provide funding in return for shares in your business that are not listed on the stock exchange.
For international selling it will be useful to have an international banking account. It enables those living abroad to access their money whenever they need to and it can be in the currency that you are in. Likewise, you could make use of International trade finance. This refers to financing international trading transactions which is an arrangement with the bank or other institution that they pay for goods on behalf of the company. Or you could use oversea banks. These banks allow to receive in local currency which means you can wait till the exchange rate is in your favour.
Using this means customers may want to deal with a bank that is familiar and in the same currency and language which makes oversea banks useful. Lastly, you could use factoring. Factoring is when you sell your debt to a factoring company and they will give you up to 85% of the cash and then they will get the money from your debtors. Using this service means you can get the money straight away but they charge a fee to use it. Financial support is available for businesses that are trading internationally. One type of support is forward foreign exchange.
This is an agreement to purchase or sell an amount of foreign currency at a future date at a predetermined price. Or use spot foreign exchange which is a contract to exchange two currencies at an exchange rate agreed today. Then there is derivative which is an agreement between two parties that has a value, based on expected future price movements of the asset to which it is linked-called the underlying asset such as a share or currency. Examples are currency options and financial futures. Furthermore, there is currency options.
This gives the owner the option the right to buy or sell the indicated amount of foreign currency at a specified price before a specific date. Lastly, there are financial futures which is contract to buy or sell a financial instruments (treasury bills, certificates of deposit and foreign currency) at a specific future date and at a specified price. In conclusion, if the entrepreneur thinks carefully about when and how they will expand they will be successful. They can also gain extra help from institutions in which provide specific help tailored to them and can pick the best finance to help them achieve the expansion.