planning a business and raising finance: external finance

authorised share capital

maximum amount of money that can be legally raised

bank overdraft

an agreement between a business and a bank where a business can spend more money than it has in its account. interest is only charge when they business spends more than the agreed amount.

capital gain

profit made from selling a share for more than it was bought

crowd funding

where a lage number of individuals invest in a business or project over the internet

debenture

a long term loan to a business

equities

a ordinary share

external finance

money raised from outside the business

issued share capital

amount of current share capital gained from the sale of shares

lease

a contrct to aquire the use of resources such as property or equipment

peer to peer lending

where individuals lend to other individual without prior knowledge of them on the internet

permanent capital

share capital that is never repaid by the company

secured loans

where the lender requires security such as property incase the borrower defaults or cannot repay it

share capital

money introduced into the business through the sale of shares

unsecured loans

there are no assets that the lender has rights to if the borrower defaults

share capital

money introduced into the business

venture capitalists

provider of fund for small or medium sized companies that are considered too risky for other investors

sources of external finance

• banks

• family and friends

• peer to peer ending

• business angels

• crowd funding

• venture capitalism

family and friends

• family and or close friends

• money is loan

• little to no interest

• do not interfere directly or have ownership

• if cannot be repaid valuable relations can be lost

suitability of family or friends as a source of external finance

• small businesses

• lifestyle businesses

• business start-ups

businesses with high flexibility

banks

• usualy involve start up because bank accounts are required for that

• required for financial transactions such as salaries

• formal application required

suitability of banks as a source of external finance

Large sums of money are able to be loaned from the bank, but it is likely to be much easier for bigger businesses such as PLC to lend money from banks than smaller businesses such as Sole traders.Banks typically have lower interest rates compared to other sources of external finance, but they also require businesses to meet strict credit criteria and may involve lengthy approval processes.

peer to peer lending description

• occurs online so its faster

• organised by specialists

• unsecured

• no knowledge or relationship with the lender needed

• sites may charge a percentage of the price

suitability of peer-to-peer lending as a source of external finance

Best for smaller amounts due to quicker, unsecured loans without personal relationships.

• used for small businesses

business angels

• people who invest large sums of money in exchange for a percentage of the business during start up. usually offer financial advice

• tax relief is offered for business angels

• surplus income

• must have a unified vision in order to be succesfull

• can heavily influence a business

suitability of peer-to-peer lending as a source of external finance

high interest rates

often unsecured

used in small businesses

crowd funding in detail

a large number of investors who invest in small amounds on online platforms such as kickstarter

no credit rating required

persuasive business plan required

negative publicity

plagerism

suitability of crowd funding as a source of external finance

Successful campaigners often need strong marketing skills and a compelling business plan to attract potential investors. However, potential concerns include the risk of negative publicity if the project fails, and issues like plagiarism of ideas might arise.

venture capitalism

• used for business investments at layer stages in a business and are entitled to a share of profit

methods of getting finance

• banks

• share capital

• grants

• trade credit

• leasing

banks (3)

overdraft

secured loan

unsecured loans

share capital detailed method

money introduced through the sale of shares

• can be sold for higher than the asking price

• occurs in public limited companies

• shares are sold on the stock market

• buying shares entitles the owner to a vote

3 types of shares

ordinary shares:shares can be bought and sold at higher prices and entitle voting rights

preference shares: offered to special people who get fixed rates and do not have voting rights . but they are entitled to dividends before ordinary shareholders

deferred shares: a share that does not have any rights to the assets of a company undergoing bankruptcy until all common and preferred shareholders are paid.

grants

an amount of money given by the government to a businesses that meet specific criteria

• do not need to be repaid

• must be used for intended purpose

trade credit

• used for revenue expenditure and used at a later date e.g 30 to 90 days

• interest free

• no discounts for early payment

leasing

a contract used to aquire the use of resources like property or equipment

• no large sums of money are needed

• maintenance and repair is not a cost

• high quality equipment

• useful for occasional usage of equipment

• easier to aquire