5.3 sources of finance

why do business need finance

• start up

• expand

• capital investment

• running costs higher than expected

• cash flow issue

• fall in demand

short term finance

paid back within a year, not suitable for large amounts

medium term finance

3-5 years suitable for assets with a shorter life span

long term finance

over 5 years, suitable for large amounts and assets with a longer life span

venture capital

• investment from an established business or bank into another business for a return in equity in the business

• high risk start ups

ADV of venture capital

• potential for large sums of money

• expertise to help the business

• makes it easier to attract other sources of finance

DIS of venture capital

• long and complex process

• initially expensive for the firm (legal and accounting fees)

• partial loss of ownership

• risk of conflict

crowdfunding

• raises finance from a lot of different people investing small amounts of money

• investors may receive equity or gifts in return

ADV crowdfunding

• access to capital without needing traditional loans or investors.

• can generate publicity

• less financial risk compared to taking on debt

DIS crowdfunding

• not all campaigns succeed — risk of wasting time and effort

• often requires giving rewards, equity, or other returns to backers

• public failure can damage reputation

• intellectual property risk if ideas are shared without a patent

sources of finance

• overdraft

• retained profit

• share capital

• loan

• venture capital

• crowd funding

• debt factoring

debt factoring

• a business sells its accounts receivables to a third party at a discount

• the factor makes their money by getting the full amount

• short-term

ADV debt factoring

• immediate cash from unpaid invoices

• reduces risk of bad debts

• improves cash flow

DIS debt factoring

• only a percentage of debt is received

• can damage customer relationships

• costs/fees reduce overall profit

loan

• money that is borrowed, typically from a financial institution, which must be repaid with interest over an agreed period

• long-term

ADV loan

• fixed repayment schedule

• good for large amounts

• no loss of ownership

DIS loan

• interest costs

• need good credit rating

• risk if repayments missed

overdraft in business

• a facility that allows a business to withdraw more money from its bank account than is available, up to an agreed limit

• short-term borrowing solution

ADV overdraft

• flexible, only pay interest on amount used

• good for short-term cash flow issues

DIS overdraft

• high interest rates

• can be called in at short notice

retained profit

• profit that is reinvested in the business instead of being distributed to shareholders

• long-term

ADV retained profit

• no repayment or interest

• keeps ownership control

DIS retained profit

• limited to what’s available

• may reduce dividends to shareholders

share capital

• money raised by a company through the issuance of shares, representing ownership equity in the business

• long-term

ADV share capital

• large amounts can be raised

• no repayment or interest

DIS share capital

• loss of ownership/control

• dividends expected by shareholders