Business finance

• Business finance


  Money needed to get started, allow growth, and fund continuing activity
• Capital


  Money needed to start and operate a business
• Finance department


  Manages finances and ensures business remains liquid
• Starting a business


  1. Estimate start-up capital needed in business plan

  2. Often get start-up loan to cover initial costs
• Expanding a business


  1. Require more capital expenditure for equipment, buildings, IT, vehicles

  2. Spend on research and development for new products
• Working capital


  Spending on raw materials, wages, utilities to keep business operational
• Without working capital, business would be unable to cover day-to-day expenses and could suffer cash-flow problems leading to failure
• Short-term finance


  Used to maintain positive cash flow, e.g. get through periods of poor cash flow, bridge gaps in customer payments, provide extra cash for sudden changes in orders
• Long-term finance


  Usually used to buy fixed assets for expansion, e.g. new production facility
• Crowdfunding


  Businesses access finance from large number of small investors on online platforms, funds are voluntary 'donations'
• Microfinance


  Small-scale financial support for small start-up businesses in less developed countries, e.g. loans and insurance
• Advantages of crowdfunding


  • Businesses don't have to return funds or pay dividends
  • Investors often attracted by incentives like early access to product
• Disadvantages of crowdfunding


  • Business has to reach target amount before funds are released
  • Businesses need persuasive plan to convince investors
• Advantages of microfinance


  • Provides access to credit for people who wouldn't normally have it
  • Allows start-ups and expansions
• Disadvantages of microfinance


  • Only small loan amounts may be offered
  • Business owners may get into excessive debt if accessing multiple microfinance sources
• One of the most common reasons for new business start-ups failing is not lack of finance for buildings/equipment but lack of finance for regular expenses, especially before sales start
• Internal source of finance

  Money that comes from within the business, e.g. owner's capital, retained profit, selling assets
• External source of finance

  Money introduced into the business from outside, e.g. loans, share capital
• Internal sources of finance

  • Owner's capital (personal savings)
  • Retained profit
  • Sale of assets
  • Sale of stock
  • Managing working capital
• Advantages of internal finance


  • Often free (no interest/charges)
  • No third-party influence
  • Can be organised quickly
  • Easier for businesses that may fail credit checks
• Disadvantages of internal finance

  • Significant opportunity cost
  • May not be sufficient for business needs
  • Less tax-efficient than external methods
• Bank overdraft


  Arrangement for business current account holders to spend more than they have, charged interest daily
• Bank loan


  Sum of money borrowed from bank and repaid with interest over a specific period, can be short or long-term
• Hire purchase/leasing


  Business acquires equipment like machinery or vehicles, spreading the cost of use over time
• Share issue/debentures


  Company raises finance by selling shares, can also issue debentures (long-term loan certificates)
• Debt factoring


  Business sells accounts receivable (invoices) to third party at a discount, receives cash immediately
• Trade credit


  Business has agreement to delay paying suppliers for a period, helps improve cash position
• Grants and subsidies


  Sums of money provided to business by governments and agencies, usually don't have to be repaid
• Shares in private limited companies

  May be sold to venture capitalists or angel investors
• Venture capitalists


  May provide guidance and expertise as part of the arrangement
• Debentures


  • Long-term loan certificates issued by limited companies
  • Must be repaid with interest to lenders
• Accounts receivable (invoices)


  • Businesses can sell to a third party at a discount
  • The third party pays the business immediately
  • Customers then pay the third party over the agreed time frame
• Delaying paying suppliers


  Helps to improve the cash position of the business
• Grants and subsidies


  • Sums of money provided to the business by governments and some outside agencies
  • Do not usually have to be repaid
  • Often provided with certain conditions attached
• Credit cards or charge cards

  • Particularly useful as a means to allow employees to make small purchases that are centrally paid
  • Interest charges can be high so use is carefully monitored
• Short-term Sources of Finance

  • Overdrafts
  • Trade credit
  • Debt factoring
• Long-term Sources of Finance

  • Bank loans
  • Hire Purchase
  • Leasing
  • Share Issue
  • Debentures
• Overdrafts


  • A limit is agreed and interest is charged only when a business 'goes overdrawn
  • Offer significant flexibility and aid cash flow
• Trade credit


  • Usually interest-free
  • A business can increase its stock without having to immediately pay for it, which can significantly enable positive cash flow if the stock is sold before payment becomes due
• Debt factoring


  • Provides a source of immediate cash to the business
  • The business does not have to handle the debt collection themselves