Raising Finance Notes

Internal Finance

• Definition: Finance from inside the business.

• Sources:

  • Owner’s capital: Personal savings.

  • Retained profit: Reinvested profit from previous years.

  • Sale of assets: Selling unused assets.

• Advantages:

  • Often free (no interest).

  • No third-party influence.

  • Quick and easy to organize.

  • Accessible for businesses with poor credit.

  • No need for complex applications or approvals.

  • Maintains business control and autonomy.

• Disadvantages:

  • Opportunity cost.

  • May be insufficient.

  • Less tax-efficient than external methods.

  • Limited availability; restricted to existing resources.

  • Potential impact on cash reserves.

External Finance

• Definition: Finance from outside the business.

• Sources:

  • Family and friends.

  • Banks: Loans (short and long term), overdrafts.

  • Peer-to-peer funding: Individuals pooling savings.

  • Business angels: Investments from individuals.

  • Crowdfunding: Finance from many small investors.

  • Other businesses: Joint ventures, investments.

Methods of External Finance

• Loans:

  • Benefits: Fixed interest rates, structured repayments.

  • Drawbacks: Increased liabilities, credit rating dependent.

• Overdrafts:

  • Benefits: Short-term flexibility.

  • Drawbacks: Can be recalled, interest payable.

• Share Capital:

  • Benefits: Large capital, no interest.

  • Drawbacks: Shareholders have voting rights, share of profits (dividends).

• Venture Capital:

  • Benefits: Attract investment when refused by other sources.

  • Drawbacks: Stake in business, loss of some control.

• Leasing:

  • Benefits: No responsibility for maintenance.

  • Drawbacks: More expensive long term.

• Trade Credit:

  • Benefits: Interest-free.

  • Drawbacks: No early payment discounts.

• Grants:

  • Benefits: No repayment needed.

  • Drawbacks: Must be used for the intended purpose.

Liability

• Unlimited Liability:

  • Owners responsible for all business debts; personal assets at risk.

  • Applies to sole proprietors and partnerships.

• Limited Liability:

  • Owners (shareholders) only lose their investment.

  • Applies to private and public limited companies.

Factors Affecting Choice of Finance

• Why is the finance needed? (Capital vs. revenue expenditure).

• For how long and how quickly is the finance needed? (Short term vs long term).

• Who will lend to the business? (Start-ups vs. established).

• How much will it cost, and how easy is it to access the finance?

• What is the legal status of the business? (Limited vs unlimited liability).

Using a Business Plan to Obtain Finance

• Reduces risk by thorough planning.

• Informs lenders/investors for their decisions.

• Helps select the most appropriate finance source.

• A detailed business plan should include a cash flow forecast.

Key Terminology

• Net Cash Flow: $Total\ Inflows - Total\ Outflows$

• Opening Balance: Previous month’s closing balance.

• Closing Balance: $Net\ Cash\ Flow + Opening\ Balance$

Uses of Cash Flow Forecasts

• Supports loan applications.

• Identifies potential cash shortfalls/surpluses.

• Aids planning.

Limitations of Cash Flow Forecasts

• Based on estimates.

• Requires skills, time, and research.

• External factors may not be reflected.