Legal structure of the business Different businesses depending on their legal structure are able to obtain different sources of finance easier than others. For example a larger company may be able to obtain a loan easier than a smaller business. I will now go on and look at the different legal ownerships are and talk about their financing. Sole traders A sole trader Is usually owned and controlled by one person. Small businesses such as sole traders are usually financed by the owners own personal money otherwise, known as capital or money borrowed from friends and family.
The owner is usually able to get an overdraft. Partnerships A partnership is a business owned and run by up to 20 people. It offers the business a greater choice of finance, as each partner will contribute to capital to the business. This instantly makes more funds available than that of a sole trader. If the business would like to expand then they can simply ask another person to Join the partnership. A general partnership will have limited liability, which is the same as a sole trader. Therefore, any external borrowing will be set against fixed assets owned by the business.
If one partner gets the business Into debt, all partners are liable for It. Partnerships are also able to use credit faceless offered by their suppliers. As a partnership have access to a larger capital than a sole trader, they are more likely to be able to secure a larger bank loan, greater hire purchase or extended credit agreements. Private limited Companies (LTD) Public Limited Companies (PL) Public limited are usually the largest form of private ownership. They able to sell their shares to the general public through the stock exchange.
The ability to sell hose shares to the general public means My business is a PL so it is able to have access to all sources of finance shown above. I will now go onto look at all of the sources of finance available to businesses and I will highlight the sources of short- term and long-term finance that my business Brutish Airways actually uses. Short Term Sources of Finance Short-term finance is mostly external ways of funding. Short-term finance is needed for different aspects of business to cover the day to day running of the business.
It is less risky for lenders to lend money on a short-term basis, as it will be repaid usually sees than one year. Many businesses use short-term sources of finance which can be found listed as money the business owes but due to be paid back within one year, it is under the section of current liabilities. I will now go on to look at sources of finance and what sources British Airways use. Overdrafts An overdraft is issued by banks as an extra on bank accounts, it is when someone is able to spend more than what they actually have in their account.
This money Is borrowed from the bank so It needs to be paid back over a period of time usually under a year when money Is put into the account. Overdrafts can be authorized and unauthorized. This means someone can agree a certain amount of money to go overdrawn which will be authorized, if the overdraft goes over this then it becomes overdraft is relatively easy to acquire and pretty much any business or anybody would be able to set one up providing they have a bank account.
An overdraft can be useful for any size business as a short-term source of finance but they would not necessarily have the same limit for example a smaller business may have a limit of EIA,OHO whereas a large organization can go into the hundreds of thousands. British Airways does not use an overdraft and is not in their balance sheets. British Airways could use an overdraft as I mentioned for shorter-term financial needs perhaps to finance something smaller such as purchasing new uniform for staff members or for something else within the business like repairing an aircraft.
Overdrafts can be a risky form of finance as it can sometimes be hard to get out of due to the hefty charges and interest rates that can sometimes come along with them. It is common that people and businesses use other forms of borrowing to supplement the payments they cannot make on the overdraft leaving a spiral in debt that the business will have to get out of through making more revenue, which is easier said than done. Hire Purchase Hire purchase is an agreement, which gives an option to purchase the asset at the end of the agreement. The asset is usually fixed against a car being bought.
Hire purchase loans usually last short to medium term, which should be put under the heading of non-current liabilities when on a balance sheet. How it works is the customer chooses a car then completed a finance application form to borrow the none to ‘buy the car. If accepted the finance company pays the motor dealer for the car thus becoming the legal owner. The customer then agrees to pay back a fixed amount of repayments before having the choice of buying the car at the end of the agreed period of time then becoming the outright owner or not pay the extra cost and return the car to the finance company.
Again, hire purchase is easily available to pretty much everyone and every business. The most likely businesses to use hire purchase are ones that need a vehicle for their everyday running of the company. British Airways have no proof of using a hire purchase agreement within their balance sheet. Although it may well be that British Airways have leased aircrafts apposed to buying them outright, so this would be put under non-current liabilities the long-term money they owe.
Looking at the notes to the accounts there are small leasing and hire purchase agreements that are coming to an end which are finance leases and hire purchase arrangements at IEEE million. However, it can still be available for them to use for something more in the background of the business that requires a vehicle. For example, BAA could take out an agreement on finance for a vehicle for its chief executives allowing them to use a company car to travel.
On the other hand, a car is not that expensive to a large company so hire purchase may not actually be used as a source of finance as they most likely would be able to buy a company car outright instantly. Credit cards A credit card is a plastic card issued by a bank giving the holder the ability to borrow money to purchase goods or services on credit. Usually credit cards have very high interest rates usually around 19% to use. As a short-term finance, option people loud use a credit card to fund small expenditure before being paid to clear the debt.
A person’s limit on a credit card is determined by their credit rating. A credit by certain businesses. All types of business would most likely be able to get hold of a credit card, but the most suitable business would be a smaller business such as a sole trader or a partnership as there are certain banks that offer a business credit card. British airways does not use a credit card as part of their financing, this particular finance would not be appropriate for them to use, due to the vast amounts f money they would need to borrow and the high interest rates it would be a more viable option to take out a loan.
Relying on credit cards to finance a business can be extremely risky. As I mentioned credit cards come with high interest rates that can be added on to the repayments at the end of each month. With British Airways having to take spend millions on the company it can be easy for them to rack up an uncontrollable debt on credit, leading to them taking out other forms of borrowing to pay off the credit cards. If they miss repayments it will also have a direct negative effect on their credit rating and their ability to keep borrowing money, which is vital for large public limited companies.
Trade credit Trade credit or otherwise known as trade and other payable is when a business receives credit to them by their suppliers who let them in a basic sense buy now and then pay later. The credit is given for a specific amount of days agreed by the suppliers and the business receiving the credit, which can be 30, 60 or up to 90 days. Sometimes, a supplier may give a discount depending on if the business pays the money within a specific period. For example, a 3% discount given if payment is achieved within 15 days of the issued 60 day credit.
Almost all businesses will use trade credit as part of their short-term finances. However, it most common for larger companies to attain trade credit easier than smaller companies, mainly due to a larger company is most likely able to pay back the money on time. Whereas, a smaller business that could not be that well known and not make a large amount of revenue to pay off their debts, even more so within the current unstable economic times. Long-term sources of finance Long-term sources of finance are needed over a longer period of time than short- ERM finance usually over one year.
There are different reasons for businesses needing long-term finance. It may be needed by businesses to expand and grow; perhaps they would like to expand into different countries meaning they would need a long-term source of funding to do this. Every business tends to have long-term sources of finance that are usually paid back or used over one year. I will now look at the different long-term sources of finance available to businesses and British Airways. Debentures A debenture is a loan that is given out by a company who are called the issuers.
In mom cases, they are secured on the borrower’s assets but usually the loan is secured on the creditworthiness and reputation of the company. There is usually a fixed term of repayment as well as a fixed rate of interest on the loan. In the event of bankruptcy, the debenture holder is considered as a general creditor. When they had From doing some research, I found out that British Airways now have a credit score of B-, which went down from B. It is not clear that British Airways have any debentures from more research I have found a debenture from law debenture and have found it within their annual reports and accounts.
