Business Btec Unit D

• Internal sources of business finance

  1. Retained profit

  2. Net current assets

  3. Sale of assets
• External sources of business finance

  1. Owner's capital

  2. Loans

  3. Crowd funding

  4. Mortgage

  5. Venture capital

  6. Debt factoring

  7. Hire purchase

  8. Leasing

  9. Trade credit

  10. Grants

  11. Donations

  12. Peer to peer lending

  13. Invoice discounting
• What is retained profit?

  Profit that can be taken out of the business or reinvested in it, by the owner
• Pros of retained profit

  - no interest charged

  - doesn't need to be repaid

  - no loss of ownership

  - available immediately

  - only available up to the amount the business has, help avoid debt
• Cons of retained profit

  - amount available may be limited

  - reduce payments to shareholder, which can cause dissatisfaction

  - once used, it is not available for alternative purposes
• Net current assets


  Money immediately available to the business Current assets owned by the business can be turned into cash
• How is net current assets calculated?

  current assets - current liabilities
• Pros of net current assets

  - encourage business to manage cash flow effectively
• Cons of net current assets

  - shorter credit term offered, putting pressure on customers

  - lower stock holdings affect ability to meet customers' needs
• What is sale of assets?


  Asset is something of value, which if sold will give instant cash injection (e.g. vans, machinery owned by the business)
• Pros of sale of assets

  - no interest charged

  - good way of raising funds

  - disposing assets no longer of use

  - reduce capital by releasing it for other purposes
• Cons of sale of assets

  - increase costs in long run, if asset need to be leased again

  - amount received might not be true reflection of the asset's value
• What is owners capital?

  Money owned by the owner after assets are sold and creditors are paid
• Pros of owners capital

  - no need of loans or overdrafts as you already have the capital invested in the business
• Cons of owners capital

  - investing your own money

  - no guarantee for return on money invested
• What is a loan?

  It is the amount borrowed from a bank for a set period of time within an agreed repayment method
• Pros of loan


  - receive the amount of money all at once

  - pay the money back in installments

  - interest fixed rate

  - therefore easier to forecast payments
• What are grants?


  Sums of money given by the government for particular purpose
• Cons of loan


  - lack of flexibility

  - need to pay back the whole amount whether you need it or not

  - interest must be paid
• Pros of grants


  - no need to pay back

  - provide financial rewards

  - makes it easier to raise finance from other private sources

  - give instant credibility and public exposure
• Cons of grants


  - need to meet specific requirements for being eligible

  - need research and planning (time consuming)
• What is mortgage?


  It is a legal agreement with a bank, which is a loan secured on property. The business will own the property after the last payment is made
• Pros of mortgage


  - affordable as easier to spread payments over the years

  - interest rates usually low
• Cons of mortgage


  - pay back more than the amount borrowed due to interest charged

  - may lose property if not able to pay back
• What is hire purchase?

  Allows a business to pay for goods in installments while using them. Will own the product at the end of the payment period
• Pros of hire purchase

  - business gets the assets without paying the full amount

  - costs are spread out

  - helping manage cash flow forecast
• Cons of hire purchase

  - if not able to pay all installments, the product will go back to the company it sold

  - after payment, product may be out of date (e.g. old model of a car)
• What is leasing?


  Consists in an upfront payment followed by regular installments. Will not own the product at the end of the payment period
• Pros of leasing


  - faster and cheaper

  - update equipment regularly

  - easier to get repairs and replacements for broken products
• Cons of leasing


  - higher fixed cost per month

  - expensive than purchase

  - commitment to contract for entire validity period
• What is trade credit?

  It is the credit extended to you by suppliers who let you buy now and pay later (usually within 30-90 days)
• Pros of trade credit

  - No interest paid

  - easy and automatic source of short-term finance

  - reduce capital requirements

  - spreads costs over longer period of time

  - helps with cash flow

  - doesn't require negotiation or formal agreement??
• Cons of trade credit


  - not available to everyone

  - need to have good record of repayments (difficult for new businesses)

  - expensive if repayments not done on time (charges and fees may be charged)
• What is crowd funding?

  It involves raising money contributions and funds from a large number of people (can be done online)
• Pros of crowd funding

  - alternative to bank loans or traditional funding

  - get feedback and guidance to improve business

  - investors can track your progress (may help to promote through their networks)
• Cons of crowd funding

  - not a quick and easy process

  - not reaching funds target, the money will return to investors

  - failure of project can lead to damaged reputation

  - ideas may get stolen if not protected by copyright
• What is peer to peer landing?

  Lending money from one business to another
• Pros of peer to peer landing


  - interest lower compared to traditional financial methods

  - fixed interest rate can be agreed

  - therefore easier to plan and budget
• Cons of peer to peer landing

  - amount available may be limited

  - only available for a short period of time
• What are donations?


  These are a lump sum given to an organization that does not have to be paid back