Finance (BS N5)

• A business plan is a written document that outlines the objectives, strategies, and tactics of a new or existing business venture.
• Sources of finance for a business

  • Internal sources
  • External sources
• Internal sources of finance

  • Owner investment
  • Retained profit
  • Share issue
• External sources of finance

  • Bank overdraft
  • Bank loan
  • Mortgage
  • Hire purchase
  • Leasing
  • Loans from family and friends
  • Grants
  • Crowd funding
  • Venture capital
• Factors to consider when choosing finance option

  • Purpose of finance
  • Organisational objectives
  • Cost and amount of finance
  • Type of business
  • Duration of finance
• Owner investment

  The owner of the business provides additional personal funds
• Advantages of owner investment

  • Does not need to be repaid
  • Readily available source of funds
  • Owner retains full control
• Disadvantages of owner investment

  • Risk of losing personal savings
  • Limited amount of additional investment
• Retained profit

  Profits generated by the business are not taken out by the owner but used for future investment
• Advantages of retained profit

  • Cost-effective
  • Less dependent on external lenders/investors
  • Retains full ownership and control
• Disadvantages of retained profit

  • May take a long time to accumulate sufficient funds
• Share issue

  Companies raise funds by issuing new shares to existing shareholders or creating new shareholders
• Advantages of share issue

  • Provides significant finance
  • Does not have to be paid back
• Disadvantages of share issue

  • Shareholders become part owners
  • Dilution of current shareholders' ownership
• Bank overdraft

  Short-term borrowing where a business is allowed to withdraw more money from its bank account than it currently has, up to an agreed limit
• Advantages of bank overdraft

  • Provides flexibility for managing short-term cash flow needs
  • Quick and easy access to funds
  • Interest only paid on amount borrowed
• Disadvantages of bank overdraft

  • Higher interest rates
  • Bank can demand repayment at any time
  • Exceeding limit leads to high fees
• Bank loan

  Borrowing where a business receives a lump sum of money from a bank and agrees to repay it with interest over an agreed period
• Advantages of bank loan

  • Provides substantial capital
  • Fixed repayment terms
  • Lower interest rates than overdraft
• Disadvantages of bank loan

  • Affects cash flow with regular repayments
  • Collateral or guarantees may be required
  • Lengthy application process
• Mortgage

  Long-term loan specifically used to finance the purchase of property or land for business purposes
• Advantages of mortgage

  • Provides large amount of capital
  • Lower interest rates
  • Structured repayment plan
  • Can build asset value
• Disadvantages of mortgage

  • Property can be repossessed
  • Complex application process
  • Repayments affected by interest rate changes
• Loan from family or friends

  Financial support from individuals personally connected to the borrower, which must be repaid
• Advantages of loan from family or friends

  • Easier to obtain
  • Flexible repayment terms
  • Lower or no interest
• Disadvantages of loan from family or friends

  • Can strain personal relationships
  • Lack of formal agreement
  • Limited borrowing capacity
• Hire purchase

  Financing arrangement where a business acquires an asset by paying in instalments, with ownership transferred at the end
• Advantages of hire purchase

  • Immediate use of asset
  • Spreads out cost over time
  • Preserves cash flow
  • Ownership obtained at end
• Disadvantages of hire purchase

  • Total cost may be higher
  • Failure to pay can result in repossession
  • Restrictions on use/disposal
• Leasing

  Financial arrangement where a business rents an asset from a leasing company for an agreed period
• Advantages of leasing

  • Lower upfront costs
  • Predictable monthly payments
  • Flexibility to upgrade assets
• Disadvantages of leasing

  • No ownership rights
  • Overall cost may be higher
  • Restrictions on customisation
• Types of grants

  • Start-up Grants
  • Expansion Grants
  • Research and Development (R&D) Grants
  • Training Grants
• Advantages of grants

  • Non-repayable funds
  • Significant funding for business development
  • Additional support provided
• Disadvantages of grants

  • Strict eligibility criteria
  • Competitive and time-consuming application process
  • Reporting requirements
• Crowdfunding

  Raising funds by collecting small contributions from a large number of individuals, typically through online platforms
• Advantages of crowdfunding

  • Access to a large pool of potential investors
  • Can generate early-stage funding
  • Opportunity to engage with community
• Disadvantages of crowdfunding

  • Significant marketing and promotion effort required
  • Success not guaranteed
  • Potential risks of intellectual property theft
• Venture capital

  Financing provided by investors (venture capitalists) to start-up businesses and emerging companies in exchange for equity
• Advantages of venture capital

  • Provides significant capital
  • Brings industry knowledge and experience
  • Enhances company's credibility