Sources of finance: Eynsham Ltd
Ai) Two possible sources of internal finance for Enysham Leisure could possibly be using retained profit. This is because the business was set up in the 1980s, which shows that the business has been around a long time. Enysham Leisure is a well established business, therefore, the business must be successful and they must be gaining profit to expand and have a, ‘chain’ of health clubs in and around Manchester. Another possible source of internal finance for Eynsham Leisure could possibly be sale of assets. Eynsham Leisure is obviously a well established business, thus must have valuable assets. These can be sold to raise cash.
ii) Two possible problems for a firm such as Eynsham Leisure of using internal finance are that if retained profit is used, the three friends who originally set up the business will have less money to spend on other things, other than their business. Another problem for a firm such as Eynsham Leisure using internal finance is that if they do decide to sell assets such as running machines, weight equipment, they won’t be able to use them again. According to the case study, there is a massive rise in interest in leisure and health. The last thing they should be doing is selling assets which are useful to the business, because this will create a drop in sales and interest, within the business.
b) Two possible sources of external finance for Eynsham Leisure apart from getting a loan are getting a venture capital. This is possible because Eynsham is a limited company. They have the power to invite another friend/family member to invest in the business. Venture capital is where another person is invited to invest. This will raise money quickly; however the venture capitalist probably would want a big share in the business. I suggested venture capital as a possible source of external finance for Eynsham Leisure because the manager is willing to allow someone else to invest in the business. ‘The market’s growing and is
there to be seized but whoever wants it must be prepared to invest’. I am
confident that a business angel would be more than happy to invest in a business such as Eynsham Leisure, because they are doing well and there is a high demand for there services. I would suggest that the senior managers approach someone on ‘Dragons Den’, with some audited
financial accounts, on past and predicted sales. They would probably want a large percentage of the business; this would be a big disadvantage, because there will be dilution of control. However, I am sure some negotiations would go a long way.
Another possible source of finance for Eynsham Leisure could possibly be to apply for a grant. I suggested this, because a grant is a form of external finance where the government invests in the business. Eynsham Ltd provides a health service towards the public. The government are often promoting people to exercise regularly, and Eynsham is a health club. It makes logical sense for the government to invest in a health club; because it will help towards making the entire popular healthier if more health clubs are built around the Manchester area. The disadvantage of applying for a grant is that it often involves a large amount of paper-work, and comes with conditions. Such as, Eynsham could possibly have to create a certain amount of jobs, for the grant to be given. However the main big advantage is that no interest needs to be paid back on the grant.
c) The possible factors the managers of Eynsham Leisure might consider whether to take another loan or not is to look at their current status, and financial records. The first question they need to look at is how much have they already borrowed? They could possibly already have a current loan, and it would be unwise to take on another loan. This is because if they do not keep up with the current payments, the assets of the business may need to be sold so that the bank gets their money on time. If not, the bank may take the health clubs away from them, to make up for the payments. The size of the loan will be another important factor. If they want to borrow a large amount of money, it will probably take longer for the loan to be paid back. If they don’t borrow enough, then they might
run short of their aim to double the numbers of clubs they run in the next three to five years. It’s important for the managers to predict how much money they are going to spend. Would the bank even be willing to borrow them the money? The bank could see their business as a risk, and lend out only half the money they are expecting. This would mean that Eynsham Leisure’s aim of doubling the number of clubs the run would
again be very hard to achieve. The managers might also want to consider if the growth and success of the business is guaranteed. There appears that there is a massive rise in the interest in leisure and health. The managers need to ensure that this rise continues, and that there is a demand for there services. If not, they may not be able to make repayments. The current interest rates may affect whether or not they buy the loan. If the current interest rates are low, this would attract the managers to take out the loan, because they will have to pay back less. If the interest rates are high, this would make it less attractive to take out a loan. Will the internal sources of finance be enough? It would be better to avoid taking out a loan, because internal sources of finance are usually better than external. This is because interest needs to be paid back on loans, and there is usually a higher risk involved.