sources of finance

• source of finance

  where a business gets money to fund business activities
• why do businesses need finance

  business set up

  day to day training

  growth and development
• how do businesses choose their source of finance?

  how much money is needed

  is the borrowing long term or short term

  the type of business
• retained profits

  portion of the company's profit that is retained for the future use of the company
• advantages of retained profit

  don't have to pay interest

  get to keep control of the business

  money is available immediately
• disadvantages of retained profits

  opportunity cost

  amount of money may be limited

  may cause shareholder dissatisfaction
• debt factoring

  selling their outstanding sales invoices to a 3rd party at a reduced price
• advantages of debt factoring

  speeds up flow of cash into the business from debts

  factoring company takes on the risk of bad debt
• disadvantages of debt factoring

  only receive a % of amount owed, therefore reducing profits

  can give the wrong impression to customers
• overdrafts

  an agreement with the bank where businesses can make payments that exceed the available cash balance
• advantages of overdrafts

  solves short term issues

  easy to arrange

  flexible
• disadvantages of overdrafts

  have to pay interest

  bank can withdraw the right to overdraft at short notice
• share capital

  the money invested in a company by the shareholders
• advantages of share capital

  able to raise substantial funds

  broader base of shareholders
• disadvantages of share capital

  loss of control by giving away % of the company

  costly and time consuming
• loans

  borrowing a fixed amount for a fixed term with regular fixed payments
• advantages of loans

  pre agreed payments

  don't lose control
• disadvantages of loans

  interest rates

  assets can be seized if repayments are missed
• venture capital

  investment made by specialist funds to finance the launch or expansion of a private company
• advantages of venture capital

  can raise substantial amounts

  Business benefits from specialist investor support

  Brings better discipline to business management & strategy

  Helps original business owners realise their investment
• disadvantages of venture capital

  Venture capitalist requires a high rate of return

  Investment often supported by a high level of bank debt in business

  Venture  capitalist will aim to sell within 5-7 years

  Loss of control – venture capitalist may  take a majority share in company
• crowdfunding

  collecting small amounts of money from a large amount of people
• advantages of crowdfunding

  access to large amounts of investors

  fast way to raise finance
• disadvantages of crowdfunding

  risks your project being copied by competitors

  if target amount isn't reached, money is returned to investors and the business gets nothing