Finance

• What are the sources of finance available to a private sector business?

  -Own equity

  -Loan from family and friends

  -bank loans

  -Mortgage

  -Bank Overdraft

  -Government Grants

  -Prince's Trust

  -Taking on a partner/Additional Partner

  -Selling more shares

  -Venture capitalist/Business Angel
• What is own equity?

  When owners invest their own cash
• What is a bank loan?

  Borrowing cash from the bank which must be repaid with interest in installments over an agreed time period
• What is a mortgage?

  type of loan used to buy property which must be repaid with interest in installments over time
• What is a bank overdraft?

  Permission from your bank to spend more money than you have in your current account
• What is a government grant?

  Money from the government that does not have to be paid back
• What is Prince's trust?

  A charity that set out to help young people or young entrepreneurs
• What is selling more shares?

  Increasing the amount of money invested in the business by inviting more shareholders to invest
• What is a venture capitalist/business angel?

  People in firms who invest in another business they think will be successful e.g. dragons den
• Which sources of finance for a private sector are not suitable for private limited companies, partnerships, and sole traders

  Prince's trust (Only sole traders)

  Taking on an additional partner (Only sole traders and partnerships)

  Selling more shares (Only Private limited companies)

  Venture capitalist/Business angel (Only sole traders, partnerships and LTDs)
• What are the benefits of own equity?

  - Doesn't need to be paid back

  - No interest needs to be paid

  - Owner(s) retain control
• What are the benefits of a loan from family or friends?

  - Often doesn't need to be paid back

  - Often no interest charged

  - Family/friends are more flexible with repayments
• What are the benefits of bank loans?

  - Once organised the money is received instantly

  - Paid back in installments with interest which is easy t plan ahead for repayments
• What are the benefits of a mortgage?

  - Is long term

  - When organised money is received instantly
• What are the benefits of a bank overdraft?

  - Allows short term cash problems to be overcome

  - Can be agreed in advance

  - Flexible
• What are the benefits of a government grant?

  - Doesn't need to be paid back

  - Control of the frim is not lost to outside parties
• What are the benefits of Prince's trust?

  - Grants don't have to be paid back
• What are the benefits of taking on an additional partner?

  - quick source of equity

  - can benefit from partners expertise and contacts

  - Partner can help share the workload
• What are the benefits of selling more shares?

  - Firms don't have to repay the amount raised

  - No interest
• What are the benefits of a business angel/venture capitalist?

  - Firms don't have to repay the amount raised or pay interest

  - Can benefit from the expertise and contacts of the investor
• What are the costs of own equity?

  - owners may not have enough money

  - Can take a long time to gather the necessary funds
• What are the costs of a loan from family and friends?

  - Can create tension if you are struggling to pay it back

  - They may not have all the funds required
• What are the costs of a bank loan?

  - Must be repaid with interest

  - Interest rates may be higher the smaller the organisation is

  - Smaller organisations may find it difficult to get a loan
• What are the costs of a mortgage?

  - The property is collateral so if the firm doesn't pay back the loan the property is seized by the bank

  - Must be repaid with higher interest
• What are the costs of a bank overdraft?

  - Interest rates can be extremely high

  - Daily interest rate is charged
• What are the costs of a government grant?

  - The firm may not qualify for a grant

  - Very time consuming to get a grant

  - May be conditions attached to get a grant
• What are the costs of Prince's trust?

  May not qualify for a grant as there are certain criteria attached
• What are the costs of taking on a partner?

  - Can't keep all the profit as the partner gets a share

  - There could be a disagreement between the partners

  - Loss of ownership/control
• What are the costs of selling more shares?

  -Profits may have to be shared out amongst more shareholders

  - The firm may not be able to sell enough new shares to raise the finance needed

  - Loss of control
• What are the costs of a venture capitalist/ business angel?

  - Loss of ownership and control

  - Investor will need to be paid a percentage of the profits which are earned
• Where does a local government raise it's finance from?

  - A grant from government funding

  - Council tax from householders
• Definition of Fixed Costs

  Expenses the business incurs which do not change with output
• Examples of fixed costs

  Rent, advertising, salaries
• Definition of Variable costs

  Expenses which change according to the level of output
• Examples of variable costs

  Electricity , raw materials
• Definition of total cost

  The amount of money the business spends to make and provide its goods and services
• Formula of Total Cost

  fixed costs + variable costs
• Formula: Total Variable Cost


  cost per unit X number of unit
• Definition of break even point

  When the business does not make a profit or a loss (total revenue = total costs )
• Formula of total profit/loss

  Sales revenue - total costs