Section 6 - Raising Finance

• Sources and Methods of Finance


  • Internal sources
  • External sources
• Sources and Methods of Finance


  • Internal sources
  • External sources
• All Businesses Need a Source of Finance
• The way in which a business is financed has an impact on its performance and the events that occur
• All Businesses Need a Source of Finance
• Businesses need finance for investment, such as new machinery
• The way in which a business is financed has an impact on its performance and the events that occur
• Businesses can use a variety of sources of finance, including loans, equity, and retained profits
• Businesses need finance for investment, such as new machinery
• Internal Sources of Finance


  Come from within the business
• Businesses can use a variety of sources of finance, including loans, equity, and retained profits
• Internal Sources of Finance


  Come from within the business
• Internal Sources of Finance


  • Depend on the profitability of the business
  • Often from the owner's personal savings
  • Likely to be used when the business is relatively small and doesn't need large amounts of finance
  • Owners may not be able to access other sources of finance
• Internal Sources of Finance


  • Depend on the profitability of the business
  • Often from the owner's personal savings
  • Likely to be used when the business is relatively small and doesn't need large amounts of finance
  • Owners may not be able to access other sources of finance
• Retained Profits


  Profits that are not distributed as dividends, but instead kept in the business to fund future investment
• Retained Profits


  Profits that are not distributed as dividends, but instead kept in the business to fund future investment
• Retained profits are a stable and efficient source of finance for businesses with spare assets
• Selling assets is another internal source of finance
• Retained profits are a stable and efficient source of finance for businesses with spare assets
• Businesses can use internal sources of finance to generate capital for investment without having to pay interest or repay the money</b>
• Selling assets is another internal source of finance
• Internal sources of finance allow businesses to retain more of their profits for future investment
• Businesses can use internal sources of finance to generate capital for investment without having to pay interest or repay the money</b>
• Internal sources of finance mean businesses don't have to pay interest or give up ownership/control
• Internal sources of finance allow businesses to retain more of their profits for future investment
• However, internal sources of finance may limit the amount of investment a business can undertake
• Internal sources of finance mean businesses don't have to pay interest or give up ownership/control
• However, internal sources of finance may limit the amount of investment a business can undertake
• External Sources of Finance


  Come from outside the business
• Places a business can get external finance


  • Owners of new business may ask family and friends to help
  • Banks
  • Peer-to-peer lending companies
  • Business angels
  • Crowdfunding
• Family and friends


  • May be willing to agree to a flexible repayment with little or no interest
  • But this could place a strain on the relationship if the money is not paid back
• Banks


  • Recognised financial institutions
  • Offer methods of finance such as loans, overdrafts and mortgages
  • Can advise a business and provide other services
  • But have strict lending criteria that can be hard for some businesses to meet
• Peer-to-peer lending


  • Individuals lend money to other individuals or businesses
  • Lenders decide how much to lend and what interest rate they want
  • Borrowers say how much they want to borrow and why
  • Lending company assesses risk and matches accordingly
  • Usually have a lower interest rate than bank loans
• Business angels


  • Wealthy individuals who invest in new or innovative businesses they think have potential
  • Offer advice and guidance in addition to funding
  • But it can be difficult and time-consuming to find one willing to invest, and the business owner has to give up a share of the business
• Crowdfunding


  • Raising money from a large number of people, usually via the internet
  • Each person contributes a small amount but collectively it can meet a large target
  • Common for start-ups, but can be used by established businesses
  • Business puts details of idea/funding need on a crowdfunding website
  • Offers rewards like early access or discounts for contributions
  • Raises awareness of product/brand, but risks idea being copied before business is up and running
• A business has a large retained profit


  They may want to invest in another business rather than save the profit, especially if bank interest rates are low
• A business wants to offer finance to a firm that aids its own success


  This can improve the supplier-buyer relationship, but the business offering finance is likely to want shares and some control/influence in the other business