sources of business finance

• • short term finance used to
  • get through periods when cash flow is poor
  • bridge gaps when large customers delay payment
  • provide the extra cash needed to produce a sudden rush order from an important customer
• • sources of short-term finance
  • bank overdraft
  • trade credit
• • bank overdraft 

  • when you ask the bank to allow the business to keep spending even when their bank balance drops below zero. a limit is agreed and the business can use it.
• • features of a bank overdraft
  • a variable interest rate
  • flexibility - interest is only paid on the amount used when it is being used
  • the bank can demand repayment within 24 hours
• • trade credit 

  • is given when a supplier provides goods but is willing to wait to be paid - for perhaps up to 3 months. this helps with cash flow
• • trade credit - SHORT TERM
  • buy now pay later if suppliers let you
  • suppliers usually offer trade credit to established businesses as (small businesses or start-ups)- suppliers don't know whether they will keep trading long enough to pay for the goods supplied.
• • sources of long term finance
  • personal savings
  • share capital
  • loans
  • venture capital
  • retained profit
  • crowdfunding
• • personal savings - LONG TERM

  • owners savings are a major source of finance. investors want to be convinced the owner will put in their own money before they invest financially
• • share capital - LONG TERM
  • raising finance by selling part ownership of the business. shareholders have the right to question the directors and receive part of the annual profits. in return the shareholder pays for the shares they buy which raises finance.
• • dividends 

  • payments made to shareholders from the company’s yearly profits. the directors of the company decide how much to pay out in dividends, sometimes it can be nothing
• • benefits of share capital
  • the capital paid stays in the business. if the shareholder wants to cash in their investment, they will need to find somebody else willing to buy the shares
  • if the business does badly, no dividends have to be paid, which is better than interest on a loan which must be paid no matter how well the business has done
• • drawbacks of share capital
  • if many shares are issued or sold, the original founders of the business may have diluted ownership. they should retain at least 50% of shares
  • if a business is listed on the Stock Exchange, it can be taken over. this can affect business decision making as it encourages focusing on short term profit rather than stable long term growth
• • loans - LONG TERM-(3 features)-a,b,c

  1. interest payments must be made on time otherwise court problems
  2. loans are secured against business assets, so if you can’t pay the loan the bank can take the asset
  3. interest rates may be fixed or variable, fixed-rate loans provide greater certainty when planning cash flows, but variable rates may be lower
• • venture capital - LONG TERM
  • a combination of share capital and loan capital. provided by an investor willing to take a chance on a small-medium sized business. they will expect significant shareholding and will finance
• • retained profit - LONG TERM
  • profit kept within the business (not paid out as dividends). best source of finance for expansion.
• • crowdfunding - LONG TERM
  • many small individual investors to put small sums of money into new business ventures that are too risky for banks and venture capitalists. not through the stock market
• • advantages of crowdfunding
  • acts as a mixture of financial method and market research; if crowdfunding can’t attract enough then business idea might not work out
  • offers chance for entrepreneurs with no personal capital to start up
• • disadvantages of crowdfunding
  • unsuitable for less exciting business ideas that don’t attract small investors
  • most attempts to crowdfund don’t reach their target level of investment