I work in a company dealing with horticultural products. The two main categories of our products are fruits and flowers. The company imports the products from countries where the products are cheaply sourced. We then distribute the products locally to wholesalers and retailers. The company’s most important assets are warehouses fitted with cooling systems as well as delivery vans or Lorries fitted with cooling systems because most of the products are perishable. The company was started in the backdrop of suppressed demand caused by the onset of the world economic crisis.
The fact that the domestic economy is recovering from the recession means has put a strain on the company’s ability to fully meet the demand of the products among the customers. The company is experiencing a high surge in demand due to the rise in incomes among households. The existing stocks cannot fully cope with the orders placed by customers. The company’s warehouses are constantly running out of stocks leading to customer frustration. In addition, estimates show that the high demand cannot be fully utilized within the capacity of the existing warehouses. The situation means that two issues are most urgent at the moment. First is the need to increase stocks by boosting the working capital to make sure that the existing facilities are utilized to the maximum. This is a short-term measure requiring urgent attention. Secondly, there is the need to expand the company’s air-conditioned warehouses. This is a long-term investment. A market analysis shows that the company may need to triple its storage capacity in the next four years.
The most appropriate source of finance for the expansion of stocks is through a short-term loan from a bank. The loan will enable the company to boost stocks promptly a fact which will improve the company’s ability to meet customers’ orders. This will lead to a rise in the profitability of the company hence the charges accompanying the loan will be easy to meet. I feel that a short term loan from a bank will be most appropriate due the fact that it is easy to access and utilize. Again, the loan will directly result in an increase in returns for the company a situation which will enable the company not only repay the debt but also build on profits which can later be ploughed back in future (Short term finance, par3).
For the expansion of air conditioned warehouse requires huge sums of money to finance. The most common ways of funding such long-term investments are long-term loans, bonds and issuance of equity. I recommend that the company issues additional equity rather than engage in long term loans. The main reason is that the funding introduces no extra risks to the company bearing in mind the long-term element. The extra equity does not attract mandatory charges unlike bank loans hence giving better flexibility in the company’s finances. The new shareholders will expect returns for their investments based on the company’s performance. Long-term debts will impose costs to the company. The fact that the market expectations are high at the moment does not guarantee that the future will remain this way. The large sums required means that the repayment period will be long and markets are prone to change. It is thus more secure to issue equities (Long Term Sources of Finance, Par2).
Works Cited
Long Term Sources of Finance. “Bized”. 2010. Web.
Short term finance. “Bized”. 2010. Web.