2.1 Raising Finance

Internal Sources of Finance

Money that’s created or raised within a business, the business doesn’t need any other stakeholder to get access to this money

Retained Profit

A businesses savings.

Pros - No interest

Cons - Limited amount, Retained profit may not be high enough to fund big projects

Selling Assets

Can sell assets to raise cash (E.g buildings or machinery that’s not in use)

Pros - No interest

Cons - Can harm a businesses operations

Personal Savings

Personal money invested by the owner of a business, most relevant to startups

Cons - Risky as they may not be able to afford it

External Sources of Finance

Money from a third party, used to fund big long term investments

Cons - Interest

Bank Loans/Mortgages

A business can borrow money from a bank

Cons - Interest, New businesses seen as risky so hard to get loan

Loan from Family and Friends

Usually used when the entrepreneur doesn’t have enough personal savings to finance the investment

If the entrepreneur gives up equity (Share of the business) then it’s no longer a loan

Hire Purchases

Paying in instalments

Pro - lets business pay for things (E.g machinery) that they otherwise could not afford

Trade Credit

When businesses pay suppliers at a later date (Supermarkets do this a lot)

Government Grant

Money given to businesses to research things the government is interested in (E.g The Horizon 2020 fund given out by the EU)

Share Capital

Businesses can sell shares (percentage of their business) and use the money for investments (E.g dragons den)

PLCs (Private Limited Companies) can sell share capital to family, friends or even a private equity company

Debt Factoring

When a business sells it’s debt to a third party.

The third party will pay off the debt but now the business must arrange and organise invoices to the third party to ensure the money is collected.

The third party business will retain a fee to cover the costs of its debt collection services

Overdraft

Service offered by banks allowing them to borrow money up to a previously agreed on limit

Businesses often pay for this flexibility through higher interest rates

Venture Capital

Involves investors (venture capitalists) providing a business with loans and share capital to support growth

will often ask for some control of the business either through shares or appointment as non-executive directors of the business

Business Angels

An experienced and affluent individual who provides funding exchange for ownership

Pro - No interest

Cons - involves transferring some ownership which can reduce the original owners control

Crowdfunding

Raising finance by allowing large numbers of people to donate small sums of money or buy shares for a small amount of money (E.g Kickstarter) often in return for a free trial or pre-release of the product

Pros - Owner can retain existing ownership (depends on type of crowdfunding)

Cons - Can take a long time so is unsuitable for businesses who need money quick

Debt

Form of external finance, form of a bank loan or selling bonds. Usually easier for established businesses with more tangible or physical assets to raise debt.

Diversification

Targeting new products at new markets to increase sales, can spread risk as it gives businesses an alternative if the demand for one product declines (E.g Uber)

Diversified Businesses and Debt

more likely to operate in a lot of markets. if one market or product goes wrong the business is not likely to be insolvent or bankrupt, ergo may have a lower cost of debt

Business Plans and Raising Finance

Banks/investors need in depth financial information before they invest, a business plan can provide detailed info about costs and expenditure which can be used to convince financial backers

Cash-Flow Forecast

Used to estimate total cash inflows and total cash outflows for a future period of time

Net cash flow is the difference between inflow and outflow, Opening Balance is the balance at the start of the month and is the same as the balance as the end of the previous

Cash-Flow Problems

Businesses, even if profitable, if they have cash-flow or liquidity problems can become bankrupt as they lack short term cash for short term debts

Improving Cash-Flow

Money owed to the businesses is known as recievable, can reduce trade credit period given to increase how quickly they recieve their receivables, improving cash flow. (E.g a plumbing company telling you to pay them back within 2 weeks instead of a month) and vice versa (A business can ask for a longer date to pay another business back)