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NEGOTIATION Lecture: 6

FINANCING THE PLAN &

HELP FOR SMALL FIRMS

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NEGOTIATION• WHY HELP SMALL FIRMS:

• 1. Creation of jobs

• 2. Sources of Innovation

• 3. Competition to large firms

• 4. A level playing field

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NEGOTIATION• RAISING FINANCE:

• a. HOW MUCH IS NEEDED ?

• b. WHAT IS IT NEEDED FOR ?

• c. SOURCES AND METHODS OF FINANCE ?

• d. GRANTS ?

• e. REDUCING THE NEED TO BORROW ?

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NEGOTIATION . HOW MUCH IS NEEDED:

• What will the finance be needed for

• a. SHORT TERM FINANCE

• b. LONG TERM FINANCE

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NEGOTIATION

.

– SOURCES AND METHODS OF FINANCE:

– 1. SHORT TERM FINANCE:

• a. OVERDRAFT• b. CREDITORS• c. FACTORING

• LONG TERM FINANCE:

a. SHORT TERMS LOANSb. LONG/MEDIUM TERM LOANSc. HIRE PURCHASEd. MORTGAGESe. GRANTSf. EQUITY/VENTURE CAOITAL

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NEGOTIATION• REDUCING YOUR NEED TO BORROW:

• 1. PREMISES

• 2. EQUIPMENT/MACHINERY

• 3. FIXTURES & FITTINGS

• 4. STOCK

• 5. DEBTORS

• 6. OTHER COSTS

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NEGOTIATION• SHORT TERM FINANCE:

• The Overdraft Simple

• Agreed Limit

• Interest Rate exceeds Base Rate

• Cash Flow usage only

• Creditors Supplies of Credit

• No Interest Charge

• Discounts possible

ENTREPRENEURSHIP&

NEGOTIATION• Factoring

Alleviates Cash Flow problems

80% of Credit Sales could be covered

Interest Rate 1% - 5% of Turnover

Administration reduced

Reduces contact with customer

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NEGOTIATION• LONG TERM FINANCE:

• Short Term Loans Used for small Capital items Inflexible Interest Rates

1 –3 years repayments permitted

Medium/Long Term Loans Used for Fixes Asset purchases

Interest Rates Fixed/ Flexible

Repayment holidays allowed

Guarantee’s required

Gearing

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NEGOTIATION• Hire Purchase Easy to arrange

Secure

High Interest Rates

Mortgages Commercial Advance up to 60%

Commercial/ Residential Advance up to 90%

Fixed/Flexible Interest Rates

Repayments over 20+ years

Finance Houses

Insurance Companies

ENTREPRENEURSHIP&

NEGOTIATION– Hire Purchase Easy to arrange

Secure

High Interest Rates

Mortgages Commercial Advance up to 60%

Commercial/ Residential Advance up to 90%

Fixed/Flexible Interest Rates

Repayments over 20+ years

Finance Houses

Insurance Companies

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NEGOTIATION• THREE MAJOR SCHEMES TO HELP BUSINESS START-UP’S:

• 1. The Business Start Up Scheme

• 2. The Loan Guarantee Scheme

• 3. The Business Expansion Scheme (established businesses only)

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NEGOTIATION• BUSINESS START UP SCHEME:

• Acceptance Criteria Sound Business Plan

• No need to be in employment No need to have own capital invested

• Benefits Payments up to £90 weekly

• Record to date 1992 onwards 40,000 annual applicants

• 50% Attrition Rates in 3 years

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NEGOTIATION• LOAN GUARANTEE SCHEME:

• Department of Trade & Industry (DTI) acts as guarantor

• Up to 70% of a bank loan guaranteed (new businesses)

• 85% of bank loan guaranteed (existing businesses)

• Loan maximum £100,000/£250,000

• Repayment 2-7 years

• Interest Premium 0.5%-1.5%

• Record to date: Since 1994, £139m of loans advanced trough scheme covering 36,000 businesses

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NEGOTIATION• THE BUSINESS EXPANSION SCHEME

• Donors U.K. tax payers (40% tax deductable):

• TO QUALIFY Donors cannot be employees

• Equity ownership limited to 30%

• Minimum Investment £500

• Maximum Investment £50,000

• RECORD TO DATE 1983-88 £750m invested

• 4,000 small businesses created

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NEGOTIATION• GRANTS;

• Criteria for acceptance:

• Applicant are dependent or based on satisfying some or all of the following factors:

• 1.

• The area in which you intend to set up your business is an important factor. Most local governments are keen to rejuvenate run down localities such as inner city areas and under populated rural areas, particularly those that are suffering a net migration of the population.

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NEGOTIATION• GRANTS: Criteria for acceptance continued

• 2. With a general increase in unemployment your business is more likely to be eligible for a grant if it is going to create employment.

• 3. Many grants and schemes are related to quite specific business activities. You would be well advised to try and identify the

• national/local private body/department representing your type of business activity and check on the availability of grants.

• 4. Many governments are keen to promote the development of new businesses in manufacturing, using and selling technology.

• 5. A number of grants and schemes are aimed at specific groups of population: the disabled, the socially disadvantaged, ethnic

• minorities and the unemployed.

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NEGOTIATION• EQUITY FINANCE:

• Qualifies: individual or Partnerships

• Original owners Possible loss of control No finance repayable

Equity holders entitled to proportion of any profits