Business BTEC Unit 3 - Aim D

Internal sources of business finance

1. Retained profit

2. Net current assets

3. Sale of assets

External sources of business finance

1. Owner's capital

2. Loans

3. Crowd funding

4. Mortgage

5. Venture capital

6. Debt factoring

7. Hire purchase

8. Leasing

9. Trade credit

10. Grants

11. Donations

12. Peer to peer lending

13. Invoice discounting

What is retained profit?

Profit that can be taken out of the business or reinvested in it, by the owner

Pros of retained profit

- no interest charged

- doesn't need to be repaid

- no loss of ownership

- available immediately

- only available up to the amount the business has, help avoid debt

Cons of retained profit

- amount available may be limited

- reduce payments to shareholder, which can cause dissatisfaction

- once used, it is not available for alternative purposes

Net current assets

Money immediately available to the business Current assets owned by the business can be turned into cash

How is net current assets calculated?

current assets - current liabilities

Pros of net current assets

- encourage business to manage cash flow effectively

Cons of net current assets

- shorter credit term offered, putting pressure on customers

- lower stock holdings affect ability to meet customers' needs

What is sale of assets?

Asset is something of value, which if sold will give instant cash injection (e.g. vans, machinery owned by the business)

Pros of sale of assets

- no interest charged

- good way of raising funds

- disposing assets no longer of use

- reduce capital by releasing it for other purposes

Cons of sale of assets

- increase costs in long run, if asset need to be leased again

- amount received might not be true reflection of the asset's value

What is owners capital?

Money owned by the owner after assets are sold and creditors are paid

Pros of owners capital

- no need of loans or overdrafts as you already have the capital invested in the business

Cons of owners capital

- investing your own money

- no guarantee for return on money invested

What is a loan?

It is the amount borrowed from a bank for a set period of time within an agreed repayment method

Pros of loan

- receive the amount of money all at once

- pay the money back in installments

- interest fixed rate

- therefore easier to forecast payments

What are grants?

Sums of money given by the government for particular purpose

Cons of loan

- lack of flexibility

- need to pay back the whole amount whether you need it or not

- interest must be paid

Pros of grants

- no need to pay back

- provide financial rewards

- makes it easier to raise finance from other private sources

- give instant credibility and public exposure

Cons of grants

- need to meet specific requirements for being eligible

- need research and planning (time consuming)

What is mortgage?

It is a legal agreement with a bank, which is a loan secured on property. The business will own the property after the last payment is made

Pros of mortgage

- affordable as easier to spread payments over the years

- interest rates usually low

Cons of mortgage

- pay back more than the amount borrowed due to interest charged

- may lose property if not able to pay back

What is hire purchase?

Allows a business to pay for goods in installments while using them. Will own the product at the end of the payment period

Pros of hire purchase

- business gets the assets without paying the full amount

- costs are spread out

- helping manage cash flow forecast

Cons of hire purchase

- if not able to pay all installments, the product will go back to the company it sold

- after payment, product may be out of date (e.g. old model of a car)

What is leasing?

Consists in an upfront payment followed by regular installments. Will not own the product at the end of the payment period

Pros of leasing

- faster and cheaper

- update equipment regularly

- easier to get repairs and replacements for broken products

Cons of leasing

- higher fixed cost per month

- expensive than purchase

- commitment to contract for entire validity period

What is trade credit?

It is the credit extended to you by suppliers who let you buy now and pay later (usually within 30-90 days)

Pros of trade credit

- No interest paid

- easy and automatic source of short-term finance

- reduce capital requirements

- spreads costs over longer period of time

- helps with cash flow

- doesn't require negotiation or formal agreement??

Cons of trade credit

- not available to everyone

- need to have good record of repayments (difficult for new businesses)

- expensive if repayments not done on time (charges and fees may be charged)

What is crowd funding?

It involves raising money contributions and funds from a large number of people (can be done online)

Pros of crowd funding

- alternative to bank loans or traditional funding

- get feedback and guidance to improve business

- investors can track your progress (may help to promote through their networks)

Cons of crowd funding

- not a quick and easy process

- not reaching funds target, the money will return to investors

- failure of project can lead to damaged reputation

- ideas may get stolen if not protected by copyright

What is peer to peer landing?

Lending money from one business to another

Pros of peer to peer landing

- interest lower compared to traditional financial methods

- fixed interest rate can be agreed

- therefore easier to plan and budget

Cons of peer to peer landing

- amount available may be limited

- only available for a short period of time

What are donations?

These are a lump sum given to an organization that does not have to be paid back

Pros of donations

- don't have to be paid back

- don't lose control

Cons of donations

- not used by many businesses

- can be small amounts of money for large companies

What is venture capital?

It is a finance provided by a business professional (e.g. Dragon's Den)

Pros of venture capital

- may offer advice and mentoring

- venture capitalists are often risk takers

Cons of venture capital

- partial loss of ownership and control

- conflicts may arise between the entrepreneur and venture capitalist

What is debt factoring?

It involves selling the business's invoices to a third party (whom is specialized in collecting debts)

Pros of debt factoring

- speeds up the flow of cash from debts

- the factor company takes the risk of the bad debt

Cons of debt factoring

- only receive % of the amount owed

- therefore reducing profit

What is invoice discounting?

It is receiving a discount off invoices for paying the supplier immediately (usually in cash)

Pros of invoice discounting

- no need to repay

- no interest charged

- no loss of ownership

- reduce the costs of the business

Cons of invoice discounting

- have to pay in cash

- which affects cash flow negatively (cash exiting the business quicker)