3.4b Longer sources of finance Flashcards
Examples of Longer sources of Finance for a business?
Personal Savings Venture Capital Retained Profit Crowdfunding Loans Share Capital
When would you use longer sources of Finance?
The sources of Finance are often used to pay of large one-off costs such as a new premise or equipment or to expand the business
What is crowdfunding?
Business obtains funding from a large amount of people,who pay a small amount of money. If enough people invest then they can raise a lot of money despite being given small amounts
What is retained Profit?
Use Profit as an extra source of income and can reinvest into the business. It is cost-effective but if there are shareholder, who want dividends. Then it isn’t viable as a long term source of Finance.
What is a loan?
A loan is an amount of money lent to a business that will be paid off with interest over a long period of time. Loan is typically from a bank but can be from an individual/ a business. Loan is not as good as share/venture capital due to your assets being on the line if you don’t pay.
The negative side and the criteria around a Loan?
You have to undertake a credit check and give the bank security by allowing them to take your assets if you don’t pay up or having a guarantor pay off your loan in the situation you become bankrupt.
What is share capital?
Money invested by shareholders and shareholder Part own the business and have certain rights. Entrepreneur should be aware of those rights and power a shareholder has if they want capital form a shareholder. A shareholder is like the dragons on dragon’s den who invest money into a business and want a percentage of it in return
What is venture capital?
Money lent by a large business to a smaller business and this is an alternative to a bank loan. However, the venture capitalist would like their money back and want some say in the direction of the company.
What is personal savings ?
Any money which the entrepreneur has saved up and is better than a loan due to having no interest. But the cost of a bank loan should be weighed up against the interest you will get from your savings and that you will lose your backup finances if you use your savings.
Scenario: If John’s Pizza Shop wanted to buy a new pizza oven and John wanted the cash to buy the new oven without asking anyone for money. Which longer term sources of Finance would John want to use? Pick 2 Letter A- Personal Savings B-Retained Profit C-Venture Capital D- Share Capital
A and B are the answers
Personal Savings
Any money that the entrepreneur has saved up. Can be before the business or while running it. Avoids bank charges. However bank charges should be weighed up against interest they can earn if they leave their savings in the bank.
Venture Capital
Money lent by a large business or successful entrepreneur to a small start up business. Sometimes banks won’t lend money if the risk is too high but venture capitalists may as they see potential. However they will want to make decisions on the operation of the business and want return on their investment.
Share capital
Amount of money invested into a business by a shareholders. They own a certain part of the business which means they have a certain right to vote on changes to the business. The entrepreneur should be aware that they may lose the ability to make quick decisions.
Loans
Amount of money lent to a business or individual which will be paid off with interest over an agreed period of time. The interest rate is likely to be fixed (not changing) so the business will know how much it will need to pay back. Interest charged on a business loan is a cost to the business, so it is included in the business’s profit and loss statement.
Retained profit
As a business begins to make a profit, it can leave the profit in the business or draw it out as an extra source of income. If the profit is reinvested, it is known as retained profit. It is a cost effective way to finance the business. However if they are shareholders, dividends needs to be payed out making it less likely that retained profit can be used as a long term source of finance.
