Theme 2 - Finance

• Internal Finance 


  When finance comes from inside the business
• External Finance 


  When the finance comes from outside the business
• Internal source - Owners Capital

  The personal savings of the business’s owner. Suitable for a sole trader and partnership
• Internal source - Retained profit 


  The profit that has been generated in previous years and not distributed to the owners is reinvested back into the business. Suitable for all businesses when they are profitable.
• Internal source - Sale of assets 


  Selling business assets that are no longer required. Suitable for all businesses as long as they are not a start up.
• Owners capital - advantages

  • No interest payments on loans
  • Easy to access funds
  • No complex paperwork or security needed
• Owners capital - disadvantages

  • Owner may not have the capital to put into the business and may still need to borrow, some businesses may have a short term debt to gain a long-term profit
• Retained Profit - advantages

  • No interest payments on loans
  • Easy access to finance
  • Owners keep control
• Retained Profit - disadvantages

  • Loss of interest payments on savings should the retained profits be left in a savings account instead
  • Opportunity cost of not being able to use the retained profits elsewhere in the business
• Sale of assets - advantages

  • No interest payments on loans
  • Straightforward sale can take place on a number of platforms e.g. eBay
• Sale of assets - disadvantages

  • Once the business has sold the asset they lose the benefit of it e.g. one less van for deliveries
• Source of finance 


  Where the finance has come from
• Method of finance 


  The use of a finance source - or what use it would be suitable for e.g. loan to buy computer equipment for the business
• External source - Family and Friends 


  Family and friends may be able to lend the business some money; however this is only suitable for sole traders.
• External source - Banks 


  Large sums of money are able to be loaned from the bank, but it is likely to be much easier for bigger businesses such as PLC to lend money from banks than smaller businesses such as sole traders
• External source - Peer-to-peer lending 


  This is when a business is able to take out a loan from a group of individuals or an Institution. The loan will then be paid back after a certain amount of time
• External source - Business angels 


  Group of business experts invest in the business in exchange for a % share in the business. this can be beneficial to the business due to the fact that the investors are able to help the business in the decision making process
• External source - Crowdfunding 


  This is when individuals are able to invest in a business in return for a share of their business. This is usually used by businesses starting up.
• External source - Other businesses 


  The business may get finance through other businesses that are looking to invest in the business in return for a percentage of their shares
• Family and friends - advantages

  • Probably be offered without the need for security and at lower rates
  • They are also unlikely to need a business plan
• Family and friends - disadvantages

  • May cause tension and problems if the finance is not repaid or the business does not succeed
  • Demand money back at short notice
• Banks - advantages

  • Lend to businesses without asking for a % of the ownership
  • Allow the business owner to continue running the business their own way
• Banks - disadvantages

  • Can be expensive compared to other sources of finance and interest must be paid back on time
  • May be hard for a new business owner to obtain a loan as they have no historical sales data to show the bank
• Peer-to-peer funding - advantages

  • Businesses can get access to funding within a week once approved
  • Business owners can apply online
• Peer-to-peer funding - disadvantages

  • Peer to peer loans are classified as private loans, so the money comes from several investors
  • If there are not enough individuals interested or willing to invest in your loan, you may not be able to acquire the entire amount that the business needs
• Business angels - advantages

  • Angels are free to make investment decisions quickly
  • The owner gets access to your investors sector knowledge and contacts
  • The owner gets access to angels mentoring or management skills
• Business angels - disadvantages

  • Not suitable for investments below £10,000 or more than £500,000
  • Owner needs to give up a share of the business
• Crowdfunding - advantages

  • Good alternative to loans for small business owners
  • Finance can be obtained without paying upfront fees
  • The business can generate funds and also promote the business at the same time
• Crowdfunding - disadvantages

  • The business will need to showcase their ideas to investors and may need to put together a video and other promotional material to attract investors
• Other Businesses - advantages

  • Can provide help and contacts in the industry
  • Good for IT or disruptive technology businesses that may not be able to get other sources of finance
• Other Businesses - disadvantages

  • May have to give a % of ownership to the other business
  • Would have to share the profits with the other business
• Loans


  Loaning money from a bank is like 'renting' the money
• Loans - advantages

  • Loan is fixed for a certain length of time so the business can plan ahead
  • Banks will not ask for a % of the business
• Loan - disadvantages

  • A bank will charge interest on the loan
  • Not very flexible, the business may incur a penalty if they decide to settle the loan early
• Overdrafts 


  When a business is allowed to spend more than it holds in its current bank account up to an agreed limit
• Overdrafts - advantages

  • A flexible way of funding day to day financial requirements
  • Interest is only payable on the actual amount borrowed
• Overdrafts - disadvantages

  • Interest rates are high
  • Bank may ask for repayment at any time
• Leasing 


  A way of renting an asset that the business requires, such as a coffee machine. Monthly payments are made and the leasing company is responsible for the provision and upkeep of the leased item.
• Leasing - advantages

  • Lower monthly costs than a loan
  • The leasing firm maintain the equipment so that the business will always have reliable working equipment
• Leasing - disadvantages

  • Often over a fixed term, meaning contracts are difficult to get out of