Raising Finance Flashcards
Sources and Methods of Finance
Why do businesses need finance
They need finance to buy fixed assets like factories and machinery
Finance is also needed to pay day to day costs like wages
What is a source of finance?
Provider of finance e.g. bank
When choosing a source of finance, name 3 things a business must consider
- Amount of money required
- Level of risk involved
- Cost of the finance
INTERNAL SOURCES
Owners capital
is the money the owner invests in the business often personal savings
- sole traders or partnerships are likely to use this source of finance
- easy to access and doesnt need paying back
Selling assets
-businesses can sell assets to generate capital
-only appropriate for businesses with spare assets
-don’t need to pay interest on money they raise
Retained profit
- Profit can be retained and built up over time for later investment
- not all businesses use this source of finance
- Dont have to pay interest on it
EXTERNAL SOURCES
Friends and family –
Owners from a new business may ask friends or family to help them out financially
Banks
common source of finance for all different types of businesses
- they can offer methods of finance e.g. loans, mortgages
- banks often have strict lending criteria
Peer - to - peer lender
operate online
- allow individuals to lend money to other individuals or businesses
- usually have a lower rate of interest
Crowd funding
- Raising money from a large number of people usually via the internet
- business raises awareness of its products or brands to people using the websites
Methods of finance
Methods of finance
Overdraft
- Where a bank lets a business have a negative amount of money in bank account
- Easy to arrange and flexible
Leasing
- If business doesnt have enough money to buy new assets they can lease them instead
- it means paying monthly sums of money over a set period of time
- AD- doesnt have to pay a large-up front sum of money
-DIS- can be more costly in long run
Grants
-Fixed sum of money given to a business often by the government
- doesnt have to be paid back
- can be long and time consuming and couldnt get the grant in the end
Trade Credit
when a business buys a good or service and doesnt have to pay straight away
- help a business with cash flow
- fail to pay trade credit on time can be bad for the business
Loans
- Loans is where a fixed amount of money is borrowed and paid back over a fixed period of time with interest
- Good long term source of finance
Share capital
Ltd and PLC can be financed by using ordinary share capital
- money doesn’t need to be repaid
- drawback of selling shares is that the original owner(s) no longer own all of the business
Venture capital
- Money that can be used as a method of finance for a business that is high risk but has potential to be successful
- can be provided by business angels
Limited liability
Owners are personally responsible for the debts of the business
- they have separate legal identity from its owners so PLC and Ltd have both limited liability
Unlimited liability
-The business and the owners are seen as one under the law
- means that any business debts become the personal debts of the owners
Where do Internal finances come from>
Within the business e.g.
a) Owner’s money
b) selling assets
c) putting rofits back into the business
Wha is Owners capital?
Money the owner invests in the business (often from their personal savings)
Who is likely to use Owners capital as a source of finance
Sole trader or partnerships
(often small businesses so don’t need large sums or cannot access ther sources of finance
