Core 4 sources of finance

Savings

Fixed-term where funds are guaranteed a set interest rate but if they are withdrawn before the end of the fixed term there are penalties to be paid.

-Quickly accessible

-No interest or extra charges apply

Doesn’t need any external credit checks

-If savings are held in a fixed term account penalties may occur for taking them out before term is up

Retained Profit

The part of profits that the owners do not distribute to shareholders but use to reinvest into the business.

-No repayments

-No payment of dividends to investors

-Can be used for any purpose

-Building it up can take a long time

-Once it’s spent it’s gone

Selling assets

Considered to be the last resort when funds are needed.

-Raises revenue from assets no longer needed but taking up space

-No loan needed

-No repayments needed

-Asset may not sell

-Asset may be sold for less than expected

Owner’s capital

The money that the owner invests in their own company

-Convenient and rapidly completed

-Does not accrue interest

-Retains ownership of business

-Limit to how much capital an owner can make available

-The amount cannot be replaced quickly

-May leave owner in vulnerable position

Private Equity

Made directly into a private company without publicity or public knowledge

-Not a loan so no repayment needed

easy access to diverse forms of capital for long periods

-Takes a share of the profits, which reduces the return to the owners profit margin.

Bank loan

Money borrowed from a bank at an agreed rate of interest for a given period

-Repayment of the loan is over an agreed period of time

-Repayments are factored into the budget

-If secured against personal assets owners home may be at risk

-May cause serious problems if payments are missed

Credit card

Similar to a personal one

-Provides interest free credit for periods of up to 56 days

-Extra fees are charged for failing to pay at least the minimum payment

-Employee spending and access needs monitoring closely

Overdraft

The account holder has an agreement with the bank to borrow a fixed amount of money to cover transactions and withdrawals

-Interest is paid on the overdrawn amount each day

-Only uses the exact amount needed and can be quickly accessed

-Overdrafts have a higher interest rates than a loan

-Some have specific conditions

Cash advance

Loan based upon future income, the borrower sells their future income to the lender at a discounted rate.

-More flexible than a credit card

-Can be approved more quickly than a loan

-May require personal guarantee putting the owner personally responsible

-Late payments charges are higher than a bank loan

Crowd funding

Allows businesses to raise funds to finance a particular projects or the business itself via online platforms.

-No formal engagement with potential investors

The pitch is to a very wide audience

-Risks of idea being stolen in not protected

-Each platform takes a fee

-Not all ideas get funding

Investor funding

Shareholders provide funds to the business through the business selling shares.

-Long-term capital can be raised

-Funds are non-refundable

-Public funded companies cannot make business critical decisions without the agreement of shareholders

-Shareholders have the right to see accounts, have directors removed, power to sue

-A share of the business is lost

Venture Capitalists

A form of private equity where investors provide funding to new or small businesses which they feel have the potential for long-term growth

-Provide business expertise

-Business owners do not have to repay

-May bring more investors in over time

-Business owners give up stake of ownership

-Can be difficult to get

-Funds can be based on performance

Angel Investor

Investor, often with experience of business or finance who has funds to invest.

-No interest to pay

-May help to develop owners skills

-Take a share of the business

-Must be a limited company

Grant funding

Government, local government and various specialist bodies provide funding to organisations, will come with conditions, money is free.

-Does not have to be repaid

-Free publicity when published

-Retain ownership

-Competition to get funding is high

-Not all businesses meet criteria

-Some will take funding back if targets are not met

Invoice factoring

Sells invoices to companies at a discount, that company then takes responsibility for getting them to pay and take a percentage of the invoice.

-Saves business from having to chase customers

-Not as many debts

Limited risk

-Loss of income

-Loss of control over how clients are dealt with

Donations

Main funding method for charities

-Donor has no ownership

-Business is not accountable to donor

-No interest paid

-Limited companies are not allowed to take donations

-Must be clear audit trail

-Not counted as income

Leasing

Obtain and use equipment without having to buy it outright

-Tax benefits

-Low capital expenditure

-Organisation does not own items so reduces equity

-Long term can end up costing more than buying

Hire Purchase

Business pays a deposit on the asset it needs, the remainder is paid off over an agreed time

-Business can use asset from the moment it makes the first payment

-Asset is owned by the organisation once final instalment has been paid

-Can be paid off in smaller instalments

-Total cost is higher than if the asset was bought outright

-Equipment not owned until paid off