Finance sources + Terms.

Internal: Sources of finance from within the business, from the owner, or from previous business income.

External: Sources of finance from outside the business, from other people putting money into the business.

Internal sources:

Owners capital:

Retained profit:

The profit made from previous years that has not been spent.
A: no need to pay interest on the money
cheapest source of finance
it can be used for any purpose
instantly available for use
happy to reinvest profit (growth of business will invest of their share of business).
D: only existing business can do this
Could be invested elsewhere (earning higher profit).
Shareholder becomes unhappy, meaning lower dividend payments.
TOB: more likely for large, established business who are profitable.
Used for: Investment into R & D, expansion and new tech.

Selling Assets:

An asset is something that is owned by a business (Land, buildings, vehicles and machinery) which is sold either for cash or by selling and leasing it back
A: A way of raising finance from selling items that no longer used by the business.
No interest paid.
D: if the business needs them later on, no longer have them to use
Business has to have something worth selling for this to be an option.
TOB: Established businesses with unused assets.
Used for: any purpose Eg. buying new assets, settling debts.

External sources:

Family and Friends:

When a business asks members of friends and family to lend finance.
A: No interest payments
Might not want money back straight away
D: Cause family arguments
Might try and tell you has to the business.
TOB: Any business -Usually smaller start-up businesses/small established businesses.

Bank loans:

An amount of money is borrowed from the bank, then repaid over a set period of time.
A: Easy and quick to set up.
Large amounts of money can be borrowed
Structured repayment terms
Interest payable
D: repayments cannot be kept up, business ricks getting poor credit rating or being made bankrupt
Collateral may be required from the bank - an asset that a bank holds as security for the repayment of the loan.
TOB: all business, except for new ones, highly risky one and ones that already have lots of loans.
Used For: Variety of purposes.

Overdrafts:

A short-term flexible loan that allows businesses to borrow variable amounts of money up to an agreed limit from its bank account.
A: Very quick to arrange
Good short term solution to a cash flow problem
D: only suitable for smaller amounts and has to be repaid within short amount of time.
Interest or charges are paid on amounts owing which tend to be high.
Bank can demand the repayments of an overdraft any time.
TOB: All business that have applied to the bank for one and the bank have approved.
Used For: Day to day expenses eg: paying suppliers/wages/energy suppliers.

Venture capitalists and business angels:

Venture capitalists - money invested in a business by a professional investors usually into risky business.
Business angels - similar to venture capitalists however tend to lend smaller amounts to new/start-up business looking to grow.
A: Can gain advice and support as well as finance
Raise money from them even when banks have refused to lend to the business.
D: Risky for venture capitalists
VC may want to have some control on how business operates.
VC: perhaps more risky businesses
BA: focus on new business or relatively new business which are looking to grow.
Used for: Start-up and expansion.

New partners:

Involves inviting someone to join the business as a new partner in return for providing some finance.
A: Additional capital for investment
Provides additional skills and experience.
D: Existing partners may be unhappy if the new partner wants to make changes
May dilute control of existing partners.
TOB: Sole traders
Used For: Existing patnerships.

Share issue:

A long-term method of providing funds for growth is to sell shares.
A: No need to repay the money invested
Cheaper than a loan
Some businesses can raise large sums of money this way.
D: Need to pay the shareholders a share of future profits
Ownerships also ,Dan’s some influence over how the business is run - original owners may lose control of business.
Risky for the shareholders (Investment may be lost if businesses fails)
TOB: Limited companies
Used For: Large expenditure Eg: expansion, takeover.

Trade credit:

Items are bought from suppliers on a ‘buy now pay later’ basis - short term method of finance where good will have to be paid for within an agreed time period but business does not have to pay for them immediately.
A: Gives the business more cash to use in the immediate future.
Interest free
D: only be used to buy certain goods.
Bills usually have to be settled within 30,60 or 90 days.
TOB: Larger established business more likely to be able to negotiate longer + larger trade credit terms.

Used for: Buying stock Eg: Raw materials.

Hire purchase:

An item is bought on finance, repayments are made each month until the final payment when time becomes the property of the firms.
A: Flexible method - can hand back the item if no longer required and payment will stop.
D: item doesn’t belong to the business until end of term.
Interest rate on hire purchase agreements can be high and the final cost can be substantially more than if the asset was bought outright.
Require a deposit followed by monthly payments +interest.
TOB: Business that don’t own a large sum of money.
Used for: Company cars, lorries and computer equipment are examples.

Leasing:

Help obtain new equipment/rents the items from its owner.
A: Cost of assets is spread over its life
No need to find a lump-sum of money to purchase it
Maintenance and repair costs payed by owner of asset.
D: May be more expensive than buying asset - owner will want to profit from the deal.
Business doesn’t own asset.
TOB: all but more established ones
Used for: renting fixed assets Eg: machinery, computers, vehicles

Government grants:

Money given to the business by the government.
A: Don’t need to repay grant
No interest payable,
D: Limited funds available
May be restrictions on what the money can be used for.
TOB: given to an entrepreneur/business for a specific reason.
Used For: suitable for start-ups, help finance new projects (especially those that create new jobs)