2.1.1 Types of Finance

bank loan

the amount borrowed can be spread over a period to match the needs of the business + allows the business to budget more effectively

owner’s savings

a very cheap form of finance as no interest needs to be paid but the amount raised tends to be quite small

grants

a sum of money for a specific project or purpose + usually awarded by the council or government

sale of assets

where a business sells things such as factories and vehicles that it no longer needs

credit card

useful for purchasing items of low value however the interest rate is extremely high

sale and leaseback

business loses ownership of the item but it still retains it in return for regular payments

retained profit

no interest needs to be paid and can be obtained quickly however this will mean less for their shareholders for some businesses

leasing

the business never owns the items but instead pays regular rental payments + usually used for items such as cars

mortgage

usually lasts around 25 years and can only be used to buy a specific asset + interest rates can be fixed or variable

trade credit

where a supplier allows you to purchase goods and pay the amount later, usually around 30 days + delays the amount of cash leaving the business

venture capital

finance obtained from people or businesses who like to invest in small or medium sized firms often for a share of the business

share capital

only available for two types of businesses but allows large amounts of finance to be raised + limited liability reduces the risk to the investor

factoring

where a business sells debt to someone else and pays a fee for that person to collect it on their behalf

crowdfunding

borrowing money from an alternative to a high street bank where many people pool their resources into funds for loans

peer to peer lending

an online platform that lets a business attract funding from private investors in return for shares, interest or a gift

overdraft

allows a business to withdraw more money from its bank account than it currently has - up to an agreed limit

angel investor

an individual who provides finance to a business (usually a start-up) in exchange for a share of ownership (equity)