2.I

• The need for finance

  Firms need money to get started to but things such as equipment, raw materials and obtain places/premisis
• Capital expenditure

  Spending on items that maybe used over and over again.

  EG: Company vehicle, New warehouse
• Revenue expenditure

  Payments for goods or services that have already been consumed or will be very soon

  EG: Wages , raw materials, fuel
• Capital

  The money provided by the owners in a business.
• Internal finance

  Money generated by the business or the current owners
• Why can a business not start

  Cannot start unless the owner provides their own capital. Is a huge risk taken. The common source of providing owners capital would be savings.
• Retained profit

  Is the profit after tax that is put back into the business and not returned to the owner. one of the single most important source of finance for the business. The cheapest source of profit.
• How is retained profit a disadvantage for small business

  Means that owners and families wont be able fund their lifestyle as they have less money.
• Advantage of retained profit

  Flexible source of finance

  Does not have to be used immediately

  Can be retained into a bank account where it will earn interest

  Can use the retained profit at a later date
• Sale of assets

  Is where a business may sell unwanted assets such as their equipment, machinery. Large companies may sell parts of their organization to raise its finances

  
  

  Another option would be through sale and leaseback where a business has something that they would need but they would sell it to a specialist company where they would lease it back to the seller at a cheaper price.
• Advantages of internal finance


  Capital is available immediately - EG: Retained profit will be in a bank account ready and waiting. Can sell assets really quickly

  Internal finance is cheap - No interest payments

  No need to involve third parties
• Disadvantages of internal finance

  Can be limited - May not be profitable always using retained profit, owners may not have any personal resources to contribute

  Not tax deductible

  No inflationary benefits

  Opportunity costs can be high
• External finance

  Finances whihc is from outside from the business
• Why may external finance not be available

  Lot of risk for lenders as it presents too much risk as well as they have no trading records
• Sources of finance

  Family & Friends

  Banks

  Peer to peer lending

  Business angels

  Crowd funding

  Other business
• Peer to peer lending

  Involves lending to unrelated people. Trans action are taken online and are organised by specialists. normally used by business but anyone can use it.

  It normally attracts people where the interest rates are good for both the borrowers and the lenders. Can be done quickly
• Advantage of peer to peer lending

  All online making it quick and easy

  Benefits the lender as they gain a profit
• Disadvantage of peer to peer lending

  No protection for the lender as they could lose money

  P2P sites may charge a price for their services

  The FSCS will not cover the participants

  for the lender the cash may not be instant
• Business angels

  People who invest money in exchange for a stake in the business. Investments are normally during the start up of the business. People may become angels because of the tax relief offered from the government
• Disadvantages of business angels

  Hard to find an angel

  Have to have shared interest

  Angels may demand individuals with considerable pressure on their time

  Have to give a share in the business.
• Crowd funding

  Where individuals lend money without previous knowledge of the owner.

  Transactions are done online
• Methods of finance

  Loans

  Share capital

  Venture capital

  Bank overdraft

  Leasing

  Trade credit

  Grants
• Share capital

  Is the sale of shares where it can raise a large sum of money.
• Issued share capital

  Money raised from the sale of shares
• Authorised share capital

  Maximun amount that shareholders can raise
• Once a share has been sold then the buyer in entitled to a share in the profit of the company as well as they can make a capital gain by selling the share at a higher price of what they originally bought it for.
• Ordinary shares

  Risky type of share where there is no guaranteed dividend.

  Size of share= Size of dividend

  Ordinary shareholders have voting rights
• Preference shares

  The shareholders receive a fixed rate of return where. this is less of a risk since their shares are given before holders of the ordinary shares receive theirs.
• Deferred shares

  Not used often and usually held by the founders of the company. Only receive a dividend when the ordinary shareholders have received theirs
• Venture capital

  Specialists in the provision of funds for small and medium sized business. Where people rather have a stake in a company. Choose to invest after the initial start up of the company, they prefer technological companies with high growth potential
• Leasing


  Is a contract which a business aquires the use of resources such as property, machinery or equipment in return for regular payments
• Advantages of leasing

  No need of large sums of money

  Maintenance are not the responsibility of the user

  Hire companies offer the up to date equipment
• Disadvantages of leasing

  Overtime leasing can become more expensive

  Loans are not secured
• Stake

  Have some control in the business and entitled to a share in the profits
• Trade credit

  Way of buying goods and services however, you pay for them at a later date but companies may ask you to pay earlier by offering discounts, Delaying payments may lead to poor business relationships
• Grants

  Financial support which helps business. Available for small upcoming business if they meet the certain criteria. Sometimes some grants dont have to be paid.
• Unlimited liability business

  No legal difference between the owner and the business, tend to be small business by one person. Have unlimited liability
• Limited liability business


  Has a legal identity separate from the owners, meaning that the business can be sued. The owners have limited liability
• Implications of unlimited liability

  Owners are exposed to the financial failure of their business

  Failure of a business can cause problems when repaying loans or other debts

  Owners can be liable for anything committed by the owners or employees which means if someone wrote something about the owner they can get compensation
• Implications of limited liability

  Shareholders are limited to the amount of money they have invested into the business

  If a limited company collapses then the owners assets are protected fully