Sources of Finance

Lesson objective:

To identify and understand, common types of finance available to a business within the Short, Medium and Long term timescale.

To research and produce a PowerPoint document listing all appropriate finance options available to fund your own business idea and their associated implications.

To match the source of finance available to 3 types of business organisation i.e. Sole trader, Private Limited and Public Limited.

Brief Introduction:

Finance is not just needed when starting a new business but you may be required to seek further finance even if you’re business is well established i.e. further expansion, R&D, new product launch, legal fees, fines etc.

No matter what business you are in, you will always have to ensure your business is adequately financed (Liquidity).

What is Cash Flow?

There are two categorise of finance methods and they are either internal or external. Within these two categorise the method of financing could be short, medium or long term.

Cash Flow:2011 2012

Sales 1000 500

Wages 600 500

Rent 500 500

Total Expenditure 1100 1000

Net Profit -100 -500

Opening Balance 500 400

Closing Balance 400 -100

Short term finance: Money that is needed to finance activities that are usually going to last less than one year. Bank overdraft- An overdraft is an agreement with a bank to

allow the business to spend money it does not have - it is a form of a loan.

Trade Credit- This is a period of time given to a business to pay for goods that they have received. It is often 28 days but some businesses might not pay for 6 months and on some occasions even a year after they have received goods.

Retained profit- Profits from a business account can be used by the owners for their own personal use or can be used to put back into the business.

Credit cards- Using your own personal or business credit card. These usually have high interest rate.

Owners' capital- The money may be the result of savings, money left to them by a relative in a will or money received as the result of a redundancy payment.

Medium term finance:These may fall in either short or long term source of finance.

Factoring- Selling your credit loans to specialised companies who buy your credit at lower price releasing your money to you.

Bank loans- Short/Medium/Long term. Negotiable. Fixed period of lending, usually low interest rate.

Leasing out- A lease effectively means that the business is paying for the use of a product but do not own it. It is also called 'hiring'. You may also lease out unwanted equipment to raise cash.

Debentures- A form of stock market loan for Ltd companies which is secured against your business assets. Failure to pay back loan on time will result in seizure of those assets by your creditor.

Long term finance: Used for financing the setting up of new businesses and for expansion of existing businesses or new product launch.

Share capital- If you are a PLC (private/public) then you can raise shares by selling ownership of your business on the stock exchange.

Asset sales- These assets could be in the form of property, machinery, equipment, other companies or even logos of your own business.

Venture capital- Venture capitalists are groups of individuals or companies specifically set up to invest in developing companies. They may ask to be part of making certain decision of the business!

Government, local authority or EU grants- This could be the local authority, the national government or the European Union. These grants are often linked to incentives to firms to set up in areas that are in need of economic development.

Workforce restructuring- Moving employees into new posts or laying off employees who have been working less than 2 years.

Activity 1 In groups, match the sources of finance

printed on the cards in categories of Internal and External.

Limited Liability:

This is when your business owes money to your creditors and should you fail to pay off your creditors, then they can only seize limited amount of your assets. Debentures and Bank Loans.

Usually as a business owner you would limit your loan security to your business assets only and not your personal assets.

To qualify for this protection your business must be registered as a Limited company with the companies house (i.e. Private or Public).

Unlimited Liability:

This is when your creditors could seize anything of value from you to recover their loan payment to you.

Sole Trader and Partnership business who are not registered with the Companies House are usually within this category.

Activity 2 Open the following link on your web browser and have a go at putting the

right types of finance in the right category.

http://www.bized.co.uk/educators/level2/finance/activity/sources11.htm

Task:

Now that you understand all the types of finance available for a business, develop a table listing 3 types of business organisation of your choice. (Sole, Partnership, etc.)

2nd column, write down the relevant sources of finance each organisation could seek out for their business needs.

Other columns, mention the advantages and disadvantages of each source of finance.

Extension:

Now research and produce a PowerPoint document listing all appropriate finance options available to fund your own business idea.

Ensure you mention the name the organisation who will finance your business.

Include any rates, repayment period and figures associated with the finance deal on offer.

See if you can work out how much in total you will have to pay for each type of finance.