Business studies 2.1 - Sources of finance

Why may a business need to raise finance?

• Starting up

• Growing

• Dealing with cash flow problems

What are the three internal sources of finance?

• Personal savings

• Retained profit

• Sale of assets

Personal savings

An owners own personal savings

Retained profit

Any profit left in the business after all costs have been covered.

Sale of assets

The process of selling property or equipment owned by the business to generate cash.

What are the six external sources of finance?

CAPBOF:

Crowdfunding

Angels (business angels)

Peer to peer funding

Other businesses

Family and friends

Crowdfunding

A method of raising capital through contributions from a large number of people, typically via online platforms.

Angels (Business angels)

Wealthy individuals who provide capital to high-risk, small business ventures or startups. Usually asking for shares

Peer to peer funding

A source of finance that relies on websites that can match investors willing to lend to business start ups with start ups needing finance. (Usually high interest)

Banks

Banks see start ups as risky. If a loan is provided, banks will insist on collateral as security.

Other Businesses

Some businesses, especially large firms, actively seek out small businesses to help them out by providing finance, in return asking for shareholding.

Family and friends

Family and friend provide. extra start up capital necessary for business start-ups, this could be taking an equity (shareholding) or providing loans where banks are unwilling.

What are the 7 methods of finance?

• Loans

• Venture capital

• Share capital

• Grants

• leasing

• trade credits

• overdrafts

Loans

Can be provided by banks and friends/family.

Involves providing cash which will be repaid over an agreed period of time (with interest)

May need collateral

Share capital

The ownership of a business is split into shares, these shares can be sold to investors who become shareholders, providing money

Venture capital

A method of providing finance in higher risk investments through loans and shares (usually high interest)

Overdrafts

A facility offered by a bank to allow a customer to continue spending money even when their account becomes negative

Leasing

An asset is rented for a monthly fee for a set period of time.

Good for avoiding large chunks of cash outflows.

Trade credit

Goods/ serviced provided are not paid for immediately

a good record of payment is needed, not good for startups

Grants

Are handouts, usually to small businesses from the government

Very rare, used to create jobs in certain areas.

Monthly balance/net cash flow

Net effect of the month on cash flow

• Cash inflow - Cash outflow

• Indicates how well each month is going for the business

Opening balance

(usually at the top)is the amount of cash the business had at the start of the month. It is the closing balance of the previous month.

Closing balance

Shows the amount of money the business has at the end of the month

• Monthly balance (net cash flow) plus opening balance

• If negative, shows the business needs extra finance, quite possibly to use overdraft

Improve cash flow

• Producing and distributing products quickly (reduces time between the cost of raw materials and the cash inflow of finished goods)

• encouraging customers to pay quickly (discounts etc)

• spend less money on equipment and avoid methods of finance such as leasing or renting.

• keep stocks to a minimum