Sources of Finance

Short term sources

* bank overdraft
* crowdfunding
* trade credit

medium term sources

* leasing
* Loans
* hire purchase (HP)
* Peer-to-Peer (P2P)
* business angel investing

Long Term sources

* mortgage
* share capital
* taking on new partners

Other sources

* government or charitable grants

Bank Overdraft definition

an agreement with the bank to access funds beyond those already in the account (to a specified limit)

Bank Overdraft advantages

* quick and flexible to organise and access
* helps cover shortfalls in payments in the immediate term

Bank Overdraft Disadvantages

* high interest rates charged daily
* limited funds that have to be repaid quickly

crowdfunding definition

* a way to raise capital through fundraising
* members of the public each invest a small amount towards an online target

crowdfunding advantages

* can be quick to raise finance, with no fees
* access to large pool of investors
* alternative source is banks deny request

crowdfunding disadvantages

* if funding target us not reached, the enterprise gets nothing and the money is returned to investors
* if you dont have a copyright or patent someone can seal your idea
* need to invest time and money to launch the project

trade credit definition

* an agreement with a supplier to receive goods immediately but pay at a later date
* credit terms are usually payment within 30 days

trade credit advantages

* enables buy now - pay later: An enterprise can raise finance through sales to pay for stock and supplies
* no interest is payable

trade credit disadvantages

* failure to settle on time may cause issues receiving credit in the future
* only offered by some suppliers

Hire Purchase definition

a large value item is paid for in a series of monthly instalments

Hire Purchase advantages

* enterprise owns the asset at the end of the borrowing term
* splits large purchases into smaller, fixed payments
* makes expensive items more affordable and easier to budget for with fixed payments

hire purchase disadvantages

* large lump sum payment often required as deposit or to settle the debt
* total repaid is more than cost price owing to interest
* failure to make a payment may result in the assets being repossesed

Leasing Definition

monthly ‘rental’ payments are made towards a large value item

Leasing Advantages

* large, expensive items become affordable
* maintenance and repair often part of the lease agreement

Leasing Disadvantages

* Items never owned by the enterprise, therefore it cannot be included as an asset
* finance costs are often very high so you pay more in total than the market value

Loans definition

a lump sum payment is provided y a bank and then repaid in monthly instalments with interest of a period of time, usually years

loans advantages

* the interest rate is fixed for the entire loan
* easy to budget each months for a known repayment amount

loans disadvantages

* interest rates may be high
* the bank may want security to lend against and could take ownership of it if repayments are not made

Peer-to-Peer Lending definition

a business lending to another business

Peer-to-peer lending advantages

* unsecured so minimal risk to personal or business assets
* quick to get money as most lenders have a waiting list of investors
* convenient online applications

Peer-to-peer disadvantages

* additional arrangement fees on top of interest payments may make borrowing expensive
* enterprises need to pass a credit check
* initial amount borrowed needs to be paid at the end of the loan period

Business angel deffinition

an investment from an individual in exchange for a share of the enterprise and its profits

Business angel advantages

* access to advice and mentoring
* quick way to secure finance
* do not need to pay interest or repayments

business angel disadvantages

* may involve a loss of control of core decision making
* differing visions may cause conflict as an angel will expect input into enterprise operation
* will need to give away a share of the enterprise

Morgage deffinition

* a loan from the bank used to purchase property or premises
* repayment terms are usually around 25 years

mortgage advantages

* long loan period means repayments are low/affordable
* no ‘empty’ money towards rent

mortgage disadvantage

* long term debt with significant overall interest
* missed payments jeopardise the property

share capital definition

raising money by selling shares in the enterprise

share capital advantages

* no repayment requirements
* any money raised can be used however the enterprise wishes

share capital disadvantages

* selling shares reduces the control and ownership of an enterprise
* shareholders expect a dividend or return on investment

taking on new partners definition

working with new people to help run the business

taking on new partners advantages

* can gain new ideas and energy
* shared risks

taking on new partners disadvantages

* may have disagreements over decisions and vision
* less profit as it will need to be shared with more people

Grants

* a grant is a cash injection
* government or charitable grants can be obtained for certain types of investment and enterprise
* they dont usually need to be paid back
* applications can take time
* there may be conditions attached to the grant which need to be fulfilled