2.1.1/2/3 Sources of Finance

• What are does long-term sources of finance mean?

  Finances the whole business over many years
• What are does medium-term sources of finance mean?

  Finances major projects or assets with a long-life
• What are does short-term sources of finance mean?

  Finances day-to-day trading of the business
• Examples of long-term sources of finance?

  -Retained profit

  -Mortgages

  -Long-term bank loans

  -Share capital
• What is retained profit?

  The most important and significant source of finance for an established, profitable business
• What are the benefits of retained profit?

  • Cheap
  • Very flexible
  • Does not dilute the ownership of the company
• What are the downsides of retained profit?

  • Danger of hoarding cash
  • Shareholders may prefer dividends if the business is not achieving sufficiently high returns on investment
  • High profits and cash flows would suggest the business could afford debt (higher gearing)
• What are mortgages?

  a loan in which the property for the loan is used as collateral, and the borrower agrees to make a series of regular payments in order to pay back the loan.
• What are medium-term sources of finance?

  • Bank loans
  • Leasing
  • Hire purchase
  • Government grants
• What are 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
  • Good for financing investment in fixed assets
  • Generally at a lower rate of interest that a bank overdraft
  • However, they don’t provide much flexibility
• What is leasing and hire purchase?

  Leasing and hire purchase are financial facilities which allow a business to use an asset over a fixed period, in return for regular payments. 
• What are short term sources of finance?

  • Short-term bank loans
  • Bank overdraft
  • Factoring
  • Trade creditors
• What is factoring?

  Where a business sells its accounts (invoices) to a third party to meet its short-term liquidity needs
• What are bank overdrafts?

  • Short-term finance, widely used by businesses of all sizes
  • An overdraft is really a loan facility – the bank lets the business “owe it money” when the bank balance goes below zero, in return for charging a high rate of interest
  • A flexible source of finance, in the sense that it is only used when needed
  • Bank overdrafts are excellent for helping a business handle seasonal fluctuations in cash flow or when the business runs into short-term cash flow problems (e.g. a major customer fails to pay on time).
• What are trade creditors?

  suppliers which have provided your business with goods and services for which you have not yet paid
• Choosing the right sources of finance?


  FINANCE

  
• Factors affecting the type and amount required?

  • What it is for?
  • The cost of the finance
  • The flexibility of the finance
  • Business organisational structure
• Personal sources of finance often used by entrepreneurs and why?

  • Cash and investments
  • Redundancy payments
  • Inheritances
  • Personal credit cards
  • Re-mortgaging

  this is because it is cheap, to keep control, little red tape (paperwork) and confidence
• Internal sources of finance are?

  • Retained profit
  • Working capital
  • Asset disposals
• Asset disposals

  • Potentially another one-off boost to finance
  • Good examples: spare land, surplus equipment
  • Note – not all businesses have spare assets
  • Often occurs after acquisitions
• Issuing shares:

  SHARES

  
• Benefits and drawbacks of shares

  SHARES

  
• Raising loan capital includes...

  • Bank overdraft
  • Bank loan
  • Debentures
• What are external sources of finance?

  • Issue shares
  • Loans
  • Overdrafts
  • Debentures
  • Venture capital
  • Suppliers
• What is a debenture?

  A debenture is a form of bond or long-term loan which is issued by the company, usually with a  fixed rate of interest 
• What are the key features of a debenture?

  • Long-term: often 10-20 years
  • Issued by the company (not a bank)
  • Fixed rate of interest
  • Usually secured against the assets of the company (provides some protection for debenture holders)
  • Can be traded
• What are venture capitalists?

  • Specialist investors in private companies
  • Often back management buy-outs (MBOs)
  • They manage investment funds designed to achieve high rates of returns
  • Tend to focus on larger investments (>£1m) than business angels
  • Will seek a large share of the share capital (equity) + representation on the Board
  • Look to sell ("exit") their investment in the medium-term (e.g. 5-7 years)
• What are the benefits and drawbacks on venture capital?

  VENTURE

  
• What is peer to peer funding?

  • Connects businesses looking for finance with individuals 
  • Managed by online intermediaries
  • Cuts out the role traditionally played by banks
  • Increasingly popular, particularly for fast-growing
• What is crowd funding?

  • Connects businesses looking for equity investment with potential investors
  • A form of peer-to-peer financing, but focused on equity investment
• What is a business angel?

  A wealthy, entrepreneurial individual who provide capital in return for a proportion of your company's shares. They have business experience and directly invest part of their assets in new and growing private business
• What is working capital?

  Money your going to use to pay your bills, use this on a daily basis
• Advantages and disadvantages of bank loans and overdrafts