Sources of finance

• Short-term finance is used to help a business maintain a positive cash flow, covering costs like equipment, stock, and bills
• Examples of using short-term finance:

  • Getting through periods when cash flow is poor for seasonal reasons
  • Bridging the gap when a large payment is delayed
  • Providing extra cash for sudden or unexpected changes in customer orders
• Overdrafts are a common form of short-term finance, but should be used carefully and only in emergencies due to high interest rates charged by banks
• Common features of a bank overdraft:

  • Variable interest rates
  • Flexibility in usage
  • The bank can demand full repayment within 24 hours
• Trade credit is the ability to buy stock now and pay for it at a later date, agreed with a supplier through a credit arrangement
• Terms and conditions of a credit agreement:

  • Credit limit
  • Credit period
  • Frequency of payment
  • Method of payment
  • Retrospective discount
• Long-term finance in businesses includes:

  • Personal savings: money saved up by an entrepreneur, no interest charges applied
  • Venture capital: money invested by individuals willing to take the risk of funding a new business in exchange for a share of profits and input into business operations
  • Share capital: money raised by shareholders through the sale of ordinary shares, giving part ownership of the business and certain rights, such as voting on changes
• Advantages of share capital:

  • Source of permanent capital
  • No refunds on shares, shareholders must find buyers if they want to sell
  • Dividends only paid if the business makes sufficient profits
• Disadvantages of share capital:

  • Dilutes control for founders as more shares issued mean more shareholders and less control
  • Business becomes vulnerable to takeover as more shares are sold publicly
• Bank loan:

  • Money lent to individuals or businesses, paid off with interest over an agreed period
  • Fixed interest rate allows for planning
  • Requires credit checks and may need assets as collateral or a guarantor
• Retained profit:

  • When a business makes a profit, it can reinvest it without interest charges or dividend payments
• Crowdfunding:

  • Involves many people investing small amounts online
  • Acts as market research and provides opportunities for individuals without access to other funding sources