Sources of Finance PDF

Sources of Finance Owner’s capital: personal savings Owners capital This is also sometimes called owners equity It shows the stake the owner has in the business This represents the net assets of the company – if all the debts of the business were paid off how much would be owed to...

Sources of Finance Owner’s capital: personal savings Owners capital This is also sometimes called owners equity It shows the stake the owner has in the business This represents the net assets of the company – if all the debts of the business were paid off how much would be owed to the owner The owner may have used savings or a redundancy pay out to start up the business, this is in theory still owed back to the owner, although they may never take it back out in the lifetime of the business When is owner’s capital appropriate? Sole traders and partnerships would be the two business forms which would mostly use owner’s capital to expand and to grow Retained profit Retained profit After a year or more of trading a business may have some profits that they are able to re-invest into the business to help it grow. The advantage of retained profits is there is no interest to pay The disadvantage is once retained profit is used it has gone and cannot be used elsewhere in the business When is retained profit appropriate? If a business is in its first year of trading it will NOT have any retained profits – as it will not have made any to retain Also, if a business has not been profitable then there will NOT be any retained profit to spend Are there any other circumstances when retained profit would not be an appropriate source of finance? Sale of assets Sale of assets A business can raise finance by selling items that they already own, these are called assets This could be: Machinery Land Premises Vehicles The business that sells the asset will no longer have the benefit of that asset and it will not appear on the balance sheet of the company – meaning the business will look less attractive to investors When is the sale of assets appropriate? All types of business can sell their assets When a business is growing it may need to raise cash fast to be able to continue to trade Assets (like a van or an iPad) can be sold quickly (same day) for cash What other assets might a business have? Advantages of selling assets In a larger business which has a portfolio of products, then the sale of assets can improve efficiency and increase capacity utilisation Assets from one brand can be sold off to raise finance to invest in another Can you link this to the Boston Box and product lifecycle theories? Disadvantages of selling assets This may not raise enough money for growth or expansion Selling assets may draw into question just how well run the business is, if it needs to sell its assets to pay bills or to continue to trade A new start-up would be in a lot of trouble if they needed to sell their assets. E.g. a café that has just opened could sell their coffee machine The difference between a source of finance and a method of finance Source of finance: This is where the finance has come from e.g. a bank Method of finance: This is the use of a finance – or what use it would be suitable for e.g. loan to buy computer equipment for the business Source of finance Method of finance External Sources of finance  Source of finance Sources of finance introduction There are many external sources of finance available to a business, these are the ones that Edexcel would like you to know the advantages and disadvantages for: 1. family and friends 2. banks 3. peer-to-peer funding 4. business angels 5. crowd funding 6. other businesses Get ready to make some notes about these on the next few slides. #1 Family and friends Private limited companies are http://j.static-locatetv.com/images/content/4/900401_cake_boss.jpg able to raise finance by selling shares to friends and family. A sole trader or partnership may also find that their family may want to contribute to the business. This may be for interest, a share of the profits or maybe even an interest free loan amongst family. Friends and family Disadvantages Downside is that it may cause tension and problems if the finance is not repaid or the Advantages business does not flourish. Loans from friends and family They may also demand their will probably be offered money back at short notice without the need for security and at lower rates and over longer terms than traditional lenders They are also unlikely to need a business plan which means the owner may not need to write one #2 banks Banks may lend a loan to a business to start-up or when a business wants to grow and expand Banks may also provide a business with an overdraft to help when they have cash flow problems All the high street banks have business departments that will deal with commercial loans Banks Disadvantages Bank loans can be expensive compared to other sources of finance and interest must be paid back on time It may be hard for a new business Advantages owner to obtain a loan as they have no Banks will lend to businesses without historical sales data to show the bank asking for a % of the ownership (unlike The owner may need to use their own Dragon’s Den) assets as security for the loan e.g. their Banks will allow the business owner to own house continue running the business their own way, and not interfere, so the owner retains control of the business (unlike business angels) #3 Peer to peer funding Lending marketplaces such as Funding Circle have gained the trust of consumers by offering lower rates than banks to business owners who want to borrow money Peer-to-peer funding matches businesses that need finance with investors who are looking for a good return on their investment Peer to peer funding Disadvantages Peer to peer loans are classified as private business loans, so the money for the loan comes from several investors or small businesses. Advantages If there are not enough individuals interested or willing to invest in your loan, Businesses can get access to funding you may not be able to acquire the entire within a week once approved amount that the business needs Business owners can apply online Investors can expect returns of 6-7% whereas a savings account might only give them 3% Lender Borrower #4 Business angels An angel investor offers to lend their personal disposable finance The angel would normally take shares in the business in return for providing finance Angels normally seek to not only provide the business with money to grow, but also bring their experience and knowledge to help the company achieve success Angel Investors seek to have a return on their investment over a period of 3-8 years Usually smaller loan amounts than a venture capitalist Business angels Disadvantages Not suitable for investments below £10,000 or more than Advantages £500,000 Angels are free to make Owner needs to give up a share investment decisions quickly of the business The owner gets access to your investor's sector knowledge and contacts The owner gets access to angels mentoring or management skills The owner will have no repayments or interest on the money lent #5 Crowd funding Crowd funding is where a large number of people fund a project over the internet making small investments each, 3 ways to fund: Donate: no money back, but rewards like tickets or a newsletter Lend: get money back with interest and satisfaction of contributing to success of a small business Invest: Invest in a business in exchange for equity or shares which may increase in value Crowd funding Disadvantages The business will need to show case their idea to investors and Advantages may need to put together a video and other promotional Good alternative to loans for material to attract investors small business owners Finance can be obtained without paying upfront fees The business can generate funds and also promote the business at the same time #6 other businesses Other businesses may wish to invest in start-ups A business may have surplus profit and view this as a way to get a good return on their investment Take a look at this list of HOT start-ups that have business investment Usually IT or disruptive technology businesses