L8 sources of finance

Created by

Mia Oakes

Cards (39)

Potential long term Sources of Business Finance 
Finances the whole business over many years.
Potential short term sources of business finance  
Finances day to day trading of the business.
Examples of long term potential sources of business finance 
-share capital
-venture capital
-mortgages
-long term bank loans
-crowd funding
Examples of short term potential sources of business finance 
-bank overdrafts
-trade creditors
-short term bank loans
-debt factoring
Finance is needed for:
-Business set up
Finance is needed for:
-Business set up
-Day-to-Day trading
-Growth and development
Main internal sources for a start up business
-founder finance
-retained profits
-friends & family
Main External sources for a start up business
-Bank loans
-Bank overdrafts
-Venture capitalists
-loans and grants
-crowd funding
Factors that affect the type and amount of finance required:
-What is the finance required for?
-The cost of the finance.
-The flexibility of the finance.
-The flexibility of the flexibility.
-The business organisational structure.
Founder Finance  
The personal sources of finance commonly used by entrepreneur.
Types of founder finance
-Cash and investments
-Redundancy payments
-Inheritances
-Personal credit cards
-Re-mortgaging
-Putting time into the business for free
Why Personal Sources are Important to a Start-
up:
-cheap
-Entrepreneur keeps more control over the business.
-The more the founder puts in, the more others will invest (added confidence).
-Little red tape or delay
-Focuses the mind!
Main Internal Sources of Finance for an
Established Business
-retained profits
-working capital
-sale of assets
Main external sources of finance for an established business
-issue shares
-bank loans and grants/overdraft
-debt factoring
-venture capital
-suppliers
Retained profits
The most important and significant source of finance for an established, profitable business
Benefits of retained profits
-Cheap -The “cost ” of retained profits is the opportunity cost for shareholders of leaving profits in the business.
-very flexible -Management control how they are reinvested. Shareholders control the proportion retained.
-does not dilute the ownership of the company-unlike the issue of new share capital.
Possible downsides of using retained profits
Can only spend/ invest the money once -need to assess other uses for it.
Shareholders may prefer dividends if the business is not achieving sufficiently high returns on investment.
Advantages of retained profits
-No interest charges
-available immediately
-avoids debt
-no loss of ownership
Disadvantages of retained profits
-amount available may be limited.
-could cause shareholder dissatisfaction as dividend payment would be reduced.
-once used it cannot be used for other purposes.
Working capital as a source of finance
-reducing working capital -a benefit from lower working capital.
-finance often wasted in excess stocks and trade debtors.
-look for very low inventory turnover ratio or high debtor days.
Working capital-(AKA-net current assets) calculation
Current assets - current liabilities = working capital.
Working capital advantages  
-quick way of raising money.
-encourages the business to manage its cash flow.
Working capital disadvantages 
-short credit terms can ruin relationships with customers.
-holding less stock could impact availability.
-may have to set lower prices to sell through stock quicke.
Sale of assets and examples
a one off boost to finance.
Examples:
-spare land, surplus equipment.
-however, not all businesses have spare assets.
Issuing shares- how it works
1)company issues new shares.
2)shareholders buy the shares.
3)company has: more cash , more shareholders.
share issues benefits
-able to raise substantial funds if the business has good prospects.
-broader base of shareholders. -Equity rather than debt=lower risk finance structure.
Share issues drawbacks 
-can be costly and time consuming.
-existing shareholders holdings may be diluted.
-equity has a cost of capital that is higher than debt.
Bank loans- long term finance
-loan provided over fixed period.
-Rate of interest either fixed or variable.
-Timing and amount of repayments are set.
-Start-up provide some security for the loan.
Bank loans definition 
money lent to an individual or business that is paid off with interest over an agreed period. Usually this rate of interest is fixed.
Bank loans advantages 
-easy to budget as repayments are pre arranged.
-no loss of ownership.
bank loans disadvantages  
-interest charged
-Usually secured against an asset that could be seized if loan is not repaid
Bank overdrafts definition
Short term finance, widely used by businesses of all sizes. Flexible source of finance in the sense that its inky used when needed.
Crowd funding definition
Crowdfunding involves many people investing small amounts of money in a business, usually online.
It provides opportunities for individuals to start up a business even if they don’t have access to other sources of funding.
-most often used in start ups
Crowd funding advantages 
-access to large amounts of investors.
-fast way to raise finance.
Crowd funding disadvantages 
-a public request for investment risks your project being copied by investors.
-If the targeted amount isn’t reached the money is returned to investors and the business gets nothing.
Grants definition  
-a fixed amount of money awarded by the government, European Union or charitable organisations.
Ways small businesses may use grants
-Hiring new employees
-Covering day to day costs
-Upgrading facilities
-Product development
-Investing in marketing
Grants advanatages 
-doesn’t have to be paid back
-There are lots of different options to apply for a grant for.
-Getting a grant can increase their chances of getting more rewards.
Grants disadvantages 
-Businesses have to meet certain criteria to get a grant.
-It is time consuming to apply for grants and complete the paperwork needed.