3.6.1 - Sources of finance

• What is are running costs?

  day to day costs associated with operating a profit
• Why can't private companies raise finance from the public?

  Due to their legal structure
• what are start up costs?

  the initial investment a new business must take before it can begin operating
• What are the advantages and drawbacks of owner's funds?

  Advantages:

  • Personal investment can show commitment
  • Selling assets generates one-off finance

  
  

  Drawbacks:

  • Personal savings risk loss
  • Selling assets may reduce operational capacity
• What types of personal funds might an entrepreneur invest in a start-up?

  Personal savings, redundancy, or inheritance
• What decision can owners or shareholders make after calculating profits?

  Take profits or reinvest them
• Why might a business need to expand its production capacity?

  To meet increased sales demand
• What types of investments can improve a business's efficiency?

  Employer training and technology purchases
• What are the key reasons for a business to develop new products?

  • Meet changing consumer demands
  • Stay competitive in the market
  • Potential for higher profits
  • Address specific health or social issues
• Internal sources of finance:

  • owner's funds
  • retained profit
  • selling unwanted assets
• External sources of finance:

  • hire purchase
  • trade credit (short term)
  • bank overdraft (short term?
  • new share issue (share capital)
  • government grants
• Factors affecting the choice of finance...

  • the amount needed
  • reason why the finance is required
  • circumstances of the business
  • the businesses' legal status
• What are internal sources of finance?

  Involves raising funds from within the business
• Benefits and drawbacks of internal sources

  benefit:

  • the business keeps full control of its operation and doesn't pay high interest

  drawback:

  • often limited
• What are external sources of finance?

  Raising funds from outside of the business
• benefits and drawbacks of external sources

  drawbacks:

  • not in full control of business operations and has to pay interest

  benefits:

  • allows business to raise larger amounts of funds
• what are owner's funds?

  when the owner invests their own personal savings into the business
• what is retained profit?

  Accumulated earnings reinvested within a company (sometimes after dividends are paid out)
• what is selling unwanted assets?

  selling spare or non-current assets e.g spare land, buildings
• what is hire purchase?

  allows business to use its products or equipment whist they're making a payment for them
• what is trade credit?

  provided by a businesses' suppliers - allowing them to have the goods now and pay for them at a later date (usually within 30 days)
• what is a bank overdraft?

  short term source of finance that allows business to withdraw funds from its accounts that aren't there - up to an agreed maximum limit
• what are loans (friends and family)?

  Informal borrowing - they may be willing to provide money either directly to the entrepeneur or into the business
• what are loans? (banks)

  an amount of money borrowed for a set period with an agreed repayment schedule
• what is a mortgage?

  a long term loan taken out to buy land or property