1.3.4 sources of finance

long term finance may be used to

start up business

purchase assets with a long life i.e property

provide money for expansion

short term finance may be used to

get through periods when cash flow is poor

provide extra cash needed to produce sudden rush order from an important customer

short term finance examples

overdraft

trade credit

overdraft

short term lending of smaller amounts of money than loan

interest only paid for amount overdraft being used rather than maximum level allowed

interest rate charged is higher than loan

banks can demand immediate repayment

may be refused if business isn’t establishe

trade credit

postpones payment for goods for 30. 60. 90 days to pay

buyer has time to sell good before paying back

business never runs out of products to sell

supplier may charge higher costs of products

long term finance examples

personal savings

bank loan

venture capital

share capital

retained profit

crowd funding

personal savings

owner may have personal savings to help business finance

no complicated paper work

no interest to pay on money-easy access

owner sacrifices spending savings on personal things like holiday

venture capital

investment for a business from a private individual not a bank

person providing money is venture capitalist- may help run business

can bring knowledge and strategies

owners may lose control

owners may have to give up large share of profits to VC

VC may require large share of business

share capital

limited companies can issue shares in return for money to raise fund or expand

don’t have to pay money back to investors

attracts new finance and raises business profile

lose ownership

shareholders choose who runs a company and key decision makers

private limited company

can issue shares to friends and family of owner (ltd)

public limited company

can float share on stock market to sell to anyone (plc)

loans

money issues by the bank, may require security like house and Hugh interest rate which will need to be paid back to bank

can help with all costs

have to pay back part of loan every month even in bad month

retained profit

after a year or more of trading a business may have some profits that they are able to re invest into business to help with growth

no interest so cheap

access to funds are quick and easy

not applicable for first year

once spent can’t be used for any other purpose

crowd funding

when a large number of people each contribute a small amount of money to a business , usually via internet

acts an advert

helps keep fixed costs minimum

may be a waste of time

alerts competition you

four models of crowd funding

debt model-investment paid back with interest

equity model-share ownership of business

reward model-free products, discounts

donation model-no return or reward