1.3.4 Sources of finance

What are some examples of short-term finance?

overdraft, trade credit

What is an overdraft

• short term lending of smaller amounts of money organised by the bank

• very high charges and interest rates

• the business can dip into the overdraft and pay it back later

Advantages of an overdraft

• extremely flexible

• interest is only paid on the amount of overdraft used

• security is not usually required

disadvantages of an overdraft

• interest rate charged is usually higher for loans

• banks can demand immediate payment (rare)

• banks may refuse to give overdraft until business is established

What is trade credit?

• source of short-term finance as it postpones payments for goods

• seller gives the buyer 30/60/90 days to pay

• buyer then has time to sell goods in their shop before paying

What are the advantages of trade credit?

• business will never run out of products to sell

• can sell product first then pay supplier so they wont have to raise finance for goods

What are the disadvantages of trade credit?

• supplier may charge a higher cost for products

• if its the first year that has asked for trade credit the supplier may say no

long term finance

• personal savings

• venture capital

• share capital

• loans

• retained profit

• crowdfunding

• floating on the stock market

What are personal savings in the context of finance?

Money saved by an individual for use

What are the advantages of using personal savings?

Easy access, no paperwork, no interest

What is a disadvantage of using personal savings?

Owner cannot spend money on other investments

What is venture capital?

Investment from private individuals in a business

What are the advantages of venture capital?

• Brings knowledge to expand business

• brings strategies and growth capital to a business

• takes on risks

What are the disadvantages of venture capital?


• owners may lose some control of their business

• owners may have to give up a large share of profits

• venture capitalists may require a large share of the business

Why would a venture capitalist fund a risky business?

• potential to grow quickly

• stake in business

• return on investment more quickly than for businesses with less growth potential

What is share capital?

limited companies can issue shares in return for money, to raise funds to grow/expand

What are the advantages of issuing shares?

• you dont have to pay the money back/pay interest to the investors

• attracts finance

• acts as an incentive for staff using shares/share options for motivation

• a way to raise your business profile

What are the disadvantages of issuing shares?

• when an individual buys shares in a business they became one of its owners

• shareholders choose who run a company and are involved in making decisions

• which gives the original owner less control

What is a loan?

Money borrowed from a bank with interest

What is a loan?

Money borrowed from a bank with interest

What are the advantages of a business loan?


• a medium long term business loan can help with all the costs of setting up a business from cash flow to expenses and paying staff

• the longer the term of the loan, the lower the monthly payments will be (spreading costs over a long period)

What are the disadvantages of a business loan?

• amount of interest you must pay a business loan depends on individual circumstance

• each month the business will have to pay back some of the loan and some interest to

What are retained profits?

after a year/ more of trading a business may have some profits that are able to have profits reinvested into the business

What are the advantages of retained profits?

No interest to pay and quick access to funds

What are the advantages of retained profits?

No interest to pay and quick access to funds

What are the disadvantages of retained profits?

Money spent cannot be used for other purposes

What is crowdfunding?

Raising small amounts from many people typically via the internet

What are the advantages of crowdfunding?


• Can provide funding

• advertise the business

• attracts advice

• helps keep fixed costs to a minimum

What are the disadvantages of crowdfunding?

• May not attract investors

• can waste time

• alerts competitors that you need funds

What are the models of crowdfunding?


• Equity

• debt

• reward

• charity models

What is the equity model in crowdfunding?

Giving share ownership for investors' money

What is the debt model in crowdfunding?


Borrowing money to pay back with interest

What is the reward model in crowdfunding?


Offering rewards for small contributions

What is the reward model in crowdfunding?


Offering rewards for small contributions

Why would a business need additional finance?

• to grow/expand

• to help with cash flow issues

Sale of assets

A business can raise finance by selling items that they already own.

This could be:

●Machinery

●Land

●Premises

●Vehicles

disadvantage of sales of assets

• The business that sells the asset will no longer have the benefit of that asset

• it will not appear on the balance sheet of the company

• meaning the business will look less attractive to investors

floating on the stock market

• A private limited company (ltd) may decide it needs more money to expand and, if appropriate,  will become a public limited company (plc)

• This means it can “float” the shares on the stock market

• Shares in the business can now be sold to the general public, generating more capital to expand

• external finance

leasing

• a way of renting an asset that the business requires, such as a coffee machine

• Monthly payments are made and the leasing company is responsible for the provision and upkeep of the leased item.

Advantages	Disadvantages
Large amounts of money are not required up front to lease machinery	Over time it can be a more expensive way to obtain assets
The leasing company are responsible for repairs and maintenance	Assets are never owned by the business

grants

• a fixed amount of money usually awarded by the government, EU or charitable organisations

• e given to a business on the condition that they meet certain criteria such as providing jobs in areas of high unemployment

Advantages	Disadvantages
Does not need to be paid back	Business needs to meet certain criteria