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Marie Nolan is the owner of ‘Marie’s Pizzas’, a successful pizza restaurant with a home-delivery service - Leaving Cert Business - Question C - 2010
Question C
Marie Nolan is the owner of ‘Marie’s Pizzas’, a successful pizza restaurant with a home-delivery service. Demand for take-aways has increased, as more people are eat... show full transcript
Worked Solution & Example Answer:Marie Nolan is the owner of ‘Marie’s Pizzas’, a successful pizza restaurant with a home-delivery service - Leaving Cert Business - Question C - 2010
Step 1
Discuss the factors that should be considered when choosing between different sources of finance.
Answer
When selecting a source of finance, several factors must be considered:
Cost
Cost is paramount as businesses should seek the cheapest source of finance available. The annual percentage rate (APR) is crucial, and businesses must carefully examine the APR associated with loans to understand the true cost of borrowing.
Purpose/Correct Match
The purpose of the funding must align with the type of finance chosen. For instance, long-term expansions should be financed with long-term solutions, while day-to-day operations might require short-term finance.
Amount
The required amount of money can influence the choice of finance. Larger sums might restrict options, as certain finance sources may not provide the flexibility needed for smaller amounts.
Control
Businesses should consider how different sources of finance affect control. For instance, taking on equity finance might mean giving up voting rights, which could affect decision-making.
Collateral
Collateral requirements can vary significantly between financing options. Some lenders require security, which might impose restrictions on the company's freedom of operation.
Risk
The level of risk associated with each source of finance is also critical, as creditors might impose conditions that impact operations, especially in economic downturns.
Status of the business
The legal structure (e.g., Private Limited Company vs. PLC) significantly impacts financing options. Companies registered as LTDs have different disclosure requirements compared to PLCs.
Availability/Credit Crunch
Current market conditions and the effects of previous credit crunches play a role in determining the availability of finance. Changes in lending conditions can affect the ability to secure funding.
Step 2
Analyse two appropriate sources of finance for acquiring an additional delivery van at ‘Marie’s Pizzas’.
Answer
Two suitable sources of finance for acquiring an additional delivery van are:
Medium Term Loan
A medium term loan is ideal for financing the delivery van. This type of loan typically lasts from one to five years, and interest is tax-deductible. While the bank may ask for collateral, this can be a structured way of securing funds to acquire necessary assets crucial for business operations.
Leasing
Leasing the delivery van provides another alternative. This source of finance involves using an asset without the need to purchase it outright. The business can benefit from tax deductions on lease payments. Additionally, this option allows for flexibility and can help manage cash flow effectively. However, it’s important to note that leasing does not confer ownership of the asset, which could be a drawback if the business wishes to own the vehicle long-term.