Debenture Loans – A debenture is a long-term loan, which does not have to be repaid until an agreed date. Debenture holders are entitled to a fixed rate of the return year and have priority over all the shareholders. The advantage of this is that individuals can supply capital to a company in the form of a long-term loan called debentures, which have to be repaid on an agreed date. These payments take priority over payments to all other shareholders.
The disadvantage is that the company has to offer some security for the loan, which can be sold if the company cannot meet the payments. In the case of a fixed debenture this is a specific asset such as a building or land. (Source – Advantages/Disadvantages – Understanding Industry by Ian Marcous pg 85-86, Definitions – Business Studies Pg 297 – 301 – Susan Hammond & A-Z Business Studies pg 148, 167 – David Lines, Ian Marcousï¿½ & Barry Martin)
From the different sources of finance I have investigated above I will now explain what the findings mean in relation to Happy Hols Ltd Ltd. Happy Hols Ltd needs a source of finance for them to have an extension which involves camping holidays. Happy Hols Ltd have many options to what kind of extension they require. This can be that they want to own a camping site which is registered to them which would involve them buying the land etc, or they could set up a joint venture which would involve them paying an existing camping site company to set it up for their customers, but in the process paying the camping site commission from its profits. Of course both types of extension would require totally different amounts of capital and both have their advantages and disadvantages. But both act as an extension and I will select the possible but appropriate sources of finance for both plans of extension of camping holidays.
If Happy Hols Ltd wanted to invest in camping holidays but wanted to extend that they had a joint venture, which is when two or more firms set up a business division that will be operated jointly, then the possible sources of finance would be a bank term loan, though sale of shares is possible or re-invested profits or even debenture loans. The reason for a bank term loan because Happy Hols Ltd would not need so much money if they were to set up a joint venture with another company.
They would just have to pay the company money to use the campsite or the land, to build the appropriate structures and to get staff to be employed unless the camping site company is able to provide it. The bank loan will just be enough to cover these costs (including paying the campsite to use the area and facilities) and from then they will have to give part of the profits to the campsite owners as commission. Then with the remaining profits pay the bank loan off and then re-invest the remaining surplus money into the business. Though this is a good idea, as Happy Hols Ltd is a small company they will have to pay higher rates of interest on the repayments.
Happy Hols Ltd could also use sale of shares to gain the finance to invest in the extension of camping holidays. First of all they would have to put the amount of shares that would have enough value for them to pay the campsite owners and to pay for the additional costs, then they would be able to get the campsite up and running. With the profits they will be able to pay the commission to the owners and keep the rest to re-invest. Though this again is a good idea (especially to the person/s who buy the shares), the administrative costs are high, prices of the shares can be difficult to value, and you might end up selling more shares one time for a certain value but another time a smaller amount of shares might cost the same value.
Another way Happy Hols Ltd could invest in camping holidays is through re-investing its profits into paying the campsite owners to use the area. Then from the profits they can pay the commission to the owners, and keep the rest. This is a fairly good idea if Happy Hols Ltd makes a lot of profit as they will not have to do anything else e.g. sell anything to gain the finance, but just carry on maximising profits. But if they do not make much or any profits it would take an extremely long time for them to get the required capital.
From the sources of finance mentioned above, all these allow Happy Hols Ltd to pay the campsite owners the money to use the campsite, make a profit, pay the commission and pay any debts. But this all depends on how successful the business is in its business venture. Instead of having a joint venture Happy Hols Ltd could invest in camping holidays by setting up their own campsite individually, and so naming it through their own name. If Happy Hols Ltd was to do this then they would need totally different types of finance to those possibly used in a joint venture. They would need sources finance, which would give much higher capital, as more money would be needed.
The possible source of financing could be Debenture loans though venture capital loans and mortgage loans could be possible as well. The reason for debenture loans is due to the fact that Happy Hols Ltd will need a lot of money to set up their own camping holiday business, this means that they would have to buy the land which could be in another country where prices could be higher, complete the construction such as the buildings, employ a work force etc.
They will have to do a considerable amount, which will involve quite a fair bit of money. As debenture loans can be quite high, Happy Hols Ltd can borrow enough that would be able to cover all these costs. Once they have set it up they can use the profits they might make, to pay the lender their due repayment on the agreed date. Though debenture loans are good for the development, something has to be offered an s security, this probably will have to be the land they have bought.
Venture capital loans could be used as well as again they will lend large sums of money to businesses and to set up your own campsite would cost a lot. They will provide the money, which then Happy Hols Ltd can buy the land with and carry out what it needs to make it a successful business. But as part of the loan Happy Hols Ltd would have to give some shares to the venture capitalist, which would have a stake in the company. Also venture capitalists charge a fee, which could costs, a lot of money. With the money the business makes as surplus, they would be able to pay off the venture capitalist but they would still loose shares.
Mortgage loans could also be used as a source of finance, as they give large sums of money as loans and have like with mortgages a long-term repayment system. Happy Hols Ltd would be able to get the money they need to buy the land and to set the campsite up, but then with the profits they would have to just give a small percentage of the money to pay the mortgage repayments. Though this is a good idea the asset that would be the land and everything on it would be the security, and so they could loose it.
The information was relevant and useful, as I needed to advise Happy Hols Ltd on appropriate sources of finance. They need a source of finance so that they can invest in the extension of camping holidays, and so they will need to know what would be the right sources of finance, that would benefit them most. This would lead to them making a big return on the investment and so the project would be successful, but this can only happen if the correct source of finance is recommended. This is what I have to find and explain. If the wrong one is used this can lead to the company going into debt or not being able to complete their plans. Selecting the right source of finance would help the company achieve their plans; this would also allow the company to grow. But also if the company’s plans are successful due to the source of finance, this would allow them to make a good profit, that they would be able to re-invest into the business to try and improve it.
The information is valid, as it has come from Business Studies books and other resources, which have been written by experts who have vast knowledge in the subject. Also the teacher knowledge is an expert source and none of the resources are wrong. It does not help a lot, as the sources of finance have not been recommended specifically to the best form of investment e.g. bank loans when buying new equipment etc. Also all the sources and resources are up to date and are totally relevant to the subject.
Happy Hols Ltd has two choices in investing into the expansion of its camping holidays, either it can go into a joint venture with an existing campsite company or start its own campsite. In both cases the required source of finance is needed but it must be the right one, for that the company is able to afford their extension at the time and promote it so that it will become successful. This could be done through the existing travel agent branches. With the profits the company would be able to pay anything it owes either as debts or as commission and still have enough for the business and shareholders.
I have decided on what source of finance that would be appropriate for each type of extension and I will also recommend which would be the best idea, in terms of the business. Firstly if Happy Hols Ltd wanted to invest in camping holidays through a joint venture, the best form of finance would a bank loan. The reason for this is because Happy Hols Ltd would not need very much to finance the joint venture, they would just have to pay the camping site company to use their site and then from their pay them commission. This is not very much and so a bank loan would be sufficient enough for the sum needed. With the profits that the company makes it would pay the commission to the campsite owners and with the remaining profits pay the bank loan off. I could see that a loan is paid in easy instalments, which makes financial planning easier.
And as the rate is fixed, the company knows how much it will pay on top of the repayment without it going up. The are not many drawbacks to this option, as when compared to other financial sources I considered. The sale of shares was not as a good idea as the loan as I could see it had very high administrative costs. Also I could see that it is difficult for shares to be valued and also due to the fluctuation of the prices, the company could be issuing too many shares when it could sell less for the same value.
But with a bank loan, the control of the company is not diluted as with the selling of shares. Also I could see that a loan would be better than re-invested profits as I could see that there was no guaranteed way that the company would make a profit. If the company wanted to use this method could have taken a long and slow time for the company to be able to save enough capital for the venture, that is only of the company was to make a profit. From these two’s drawbacks I can see that the bank loan is the easiest, quickest and most effective source of finance for the company to have a joint venture.