Sources of Finance For Alumasc Group Limited Company

Question: Discuss about theSources of Finance For Alumasc Group Limited Company. Answer: Introduction This paper uses Alumasc Group Limited Company as a case study to examine and assess the various risk associated with different sources of funding the firm can use to expand its operation. The paper will take an extensive analysis of both debt and equity finance available for the Company to meet its objective. I will analyze all the possible sources of finance and how the companies can obtain the right source of funding for its various types of businesses. Company Overview Alumasc Group Limited Company is based in London in the United Kingdom and deals in the supply of building and engineering products. This firm is listed on the FTSE Fledging Index of the London Stock Exchange. The listing is anchored on the ticket ALU in the in the sector of material and construction. It specifically majors in the sustainable building products which with the aim of managing the use of energy and water. The company was initially the biggest barrel manufacturer in Britain (Botha 2012). It manufactured aluminum products one of which was the cast metal beer casks in the 1950s. The company was taken over by Gold Fields Group in 1960. The firm altered its category from Engineering products to constructions as well as building materials in 2006. In 2007, Alumasc acquired solar shading firm called Levolux. Rationale for Seeking Funding Any business organization, with the desire of expansion regarding production, distribution, market capture, revenue, raw materials, employees and profit maximization, requires additional funds to adequately satisfy its desires. Two major sources of financing a business include debt funding and equity financing. As the Business Development Manager of Alumasc Group Limited Company, I at this moment gives a brief description of the company and finally look at the two principal sources of finance with the aim of providing the best pick for my business at the end of this study (Vera and Onji 2010). Finance Sources Debt Financing This refers to the actual borrowing of funds from lending institutions at a particular set interest rate. The possible places for borrowing money include friends and family, lending institutions like the banks and credit unions, small business administration loans, home and equity loans. Other lending institutions like the International Monetary Fund (IMF) alongside the World Bank. The money lenders have an obligation to establish the exact business operations and the risks associated with the given projects. They have to see a clearly drafted business plan and also be shown some form of security that can be helpful in case the business institution faces a financial difficulty in its operations along the way after the loans have been issued. Banks go to the extent of providing overdrafts where a borrower is allowed to withdraw more money than the current sum in their account. However, there is a maximum fixed limit of withdrawal, and the interest rate is charged on the overdraft daily. There are, however, several factors that businesses have to take into consideration before opting for this source of financing. They have to establish the exact importance of their business to retain full control and have complete freedom to run its operations. They also have to know exactly the amount of money they will owe lenders in monthly payment terms. A lot of emphases has to be put on their ability and comfort in making regular monthly submissions as part of the payment plans. They have to countercheck their credit histories to determine their qualification for the debt financing. Lastly, they have to check not only if they own the necessary collateral required, but also if they are comfortable using them in the contract. Advantages of Debt Finance Alumasc Group Limited Company The benefits associated with this type of financing are basically that the business is allowed a certain degree of freedom from its lenders during its operations. Business is free to use the borrowed funds in its way and in whatever business venture it so desires. The lender does not have any say whatsoever in how the loan is utilized by the firm. In addition to that, the bank is not entitled to the outcome of the business operations that is, the revenues and the profits realized by the firm at the end of its project. Disadvantages Debt Financing to Alumasc Group Limited Company The notable disadvantages about debt financing are that the payment may sometimes prove stressful to the small expanding business or even the companies that are starting from scratch meaning the loans serve as their starting capital. Business is required to have an excellent credit rating to receive meaningful debt financing. It is also a factor to keep in mind that one could put some of their assets at potential risk. Equity Financing This refers to the amount of money paid in cash for firms either by the personal money of a proprietor or the money obtained from the contributions of the investors. The investors put money into business with the aim of sharing in the profits should the value of company stock appreciate shortly. Equity as an investment plan deals with the issuance of stock in the organization proportion to the investment amount. It, therefore, implies that individuals with majority shares enjoys a larger portion of the cake as far as control is concerned. The sources of equity financing are friends and relatives, a group of local business owners, private investors, employees, capital venture institutions, banking investment companies, insurers, small business corporations of investments as well as the large corporations. Venture capital firms deal in rapidly growing, new technology companies. Both private stock placement and public offering of share methods are used by organizations to obtain equity financing. The former is less complicated and easily accessible to the small companies or businesses that are starting from scratch. It entails amenableness with both state and federal security legislations but not need any formalized registration with the Commission of Securities and Exchange. Public stock offering comprises of a long and expensive registration formality process. The costs associated here can even amount to twenty percent the value of the raised capital. Companies with interest in financing their expansion through equity framework are required to have formal business plans including full projections of finance. Cautious planning is an indicator to prospective investors of competence of company to overcome competition (Lee, Sameen and Cowling 2015). The combination of both sources is helpful in scattering the risks of the firm thereby ensuring adequate alternatives for future funding desires. Advantages of Equity Financing to Alumasc Group Limited Company The primary merit of equity financing is that the owner need not repay. Loans from and other debt financing forms, in contrast, immediately influence the cash flow. They also have huge consequences except when terms of repayments are met. One has more time to grow their business before having to worry about how they will eventually pay for it all (Raniszewski 2008). Disadvantages of Equity Financing to Alumasc Group Limited Company The main issue here is that of control. If the investors develop a conflicting opinion regarding the strategic direction of the firm daily firm operations, such divergent opinions have serious glitches to the owners (Ruubel and Hazak 2011). On top of that, certain equity sales like restricted initial public offers, may be complicated as well as affluent hence consuming a lot time which requires the f expert lawyers as well as accountants assistance. Assessing the Risk Associated with Each Sources Equity financing is convenient for the firms in the technology or innovation industries with high risks ventures that offer a big return on investment (Woods et al. 2013). They are the highly volatile companies that belong to deeply cyclical industries that do not have a steady cash flow to make regular loan payments. Both equity and debt financing remain central ways for companies to get capital to fund various operations. Choosing either source depends on the lasting goals and the amount of control that the owners wants to uphold. It is upheld by the experts that firms need to use both sources of financing in an acceptable ratio commercially known as the debt to equity ratio. The acceptable principle states that the rate should be considered reasonable between 1:1 and 1:2. Huge debts trigger insolvency whereas considerable amount of equity dilutes prevailing stockholders and damage earnings (Abdulsaleh and Worthington 2013). Therefore, the key is to balance between the two sources of funding. Recommendation of Sources of Financing for Alumasc Group Limited Company It is concluded that the most prudent action to take is to obtain the necessary capital from diverse sources. The firm should use both sources, and indulge the services of other professionals to help make effective decisions about financing that may arise in the course of operations. As the Business Development Manager of Alumasc Group Public Limited Company, I, therefore, give my final verdict on the financing issue, that the company should use various sources of funding that apply to equity and debt financing in its quest to raise additional funds for significant expansion and development (Vera and Onji 2010). References Abdulsaleh, A.M. and Worthington, A.C., 2013. Small and medium-sized enterprises financing: A review of literature. International Journal of Business and Management, 8(14), p.36. Botha, R.J., 2012. The role of the school principal in the South African school governing body: A case study of various members perceptions. Journal for Social Science, 30(3), pp.263-271. Fitzgerald, S. and Drake, J., 2013. Responsibility for financial management in primary schools Evidence from an English local authority. Management in Education, 27(3), pp.96-105. Lee, N., Sameen, H. and Cowling, M., 2015. 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