Unit 42-LO2 Assess the various methods through which organizations access funding and when to use different types of funding-BTEC-HND-Level 4 & 5

Course: Pearson BTEC Levels 4 and 5 Higher Nationals in Business

For organizations relying on external funds, there are many different funding options available. Organizations can rely on philanthropic funding, which includes government grants and charitable donations of both corporations and individuals. They can also turn to business income or investment.

Nonprofits may prefer one type of funding over another depending on their needs—for example, foreign governments may be more interested in investing in a particular type of enterprise if it helps them achieve diplomatic goals abroad or if the enterprise provides goods that the donor country is unable to produce itself (cloth manufacturing for instance).

Whereas private donors might find a social enterprise more appealing, since they may want assurances that their money will have a greater impact at reaching its’ intended beneficiaries–the disadvantaged groups being served by the not-for-profit.

Also Read: Develop a business plan (including financials) and communicate how you intend to scale up a business

Investment decision-making:

The main methods of financial appraisal to compare strategic or project options: payback period and net present value calculations

Payback period, net present value, and internal rate of return are the most widely used financial appraisal methods for comparing strategy and project options.

  • The payback period is calculated by dividing the cost of an investment by its cash flow in a given year. It is useful as a quick method for measuring possible opportunities but does not take into account returns on later investments.
  • Net present value takes future costs and cash flows into account when evaluating a project’s profitability and can also be calculated from expected cash flow information.
  • Internal rate of return measures profitability from 1% financing over the life of an investment; it can be viewed as either current or discounted savings depending on whether we use today’s (discounted) dollars or tomorrow’s (current) dollars to measure the project’s profitability.

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Sources of finance for growth:

The main sources of finance for growth and the benefits and drawbacks of each: bank loans, crowdfunding, peer-to-peer lending, angel and venture finance

  • Bank loans are the safest form of financing. This is because they come with collateral, which reimburses if you don’t pay. The downside to bank loans is that they entail higher interest rates and potentially require detailed reporting on a monthly basis depending on your agreement.
  • Crowdfunding options are a cheaper option than bank loans but have significantly more risks attached, such as giving away equity or not getting funded at all.
  • Peer-to-peer lending comes with the lowest margins and high returns for investors but also has lower security against failure since there is no collateral involved in this type of venture finance.
  • Venture and angel funding often comes from wealthy private individuals who see potential in one of their own ventures, products, or ideas; however, this can lead to loss of control over the business.

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