Sources of Finance

OBTAINING FINANCE

Why do businesses need finance?

When setting up
To survive The businesss cash inflows must
match its cash outflow in order to pay off
debts
To expand buy more assets
Unforeseen events

Borrowing Money
Time
frame

Possible
usage

Short term

Under 1 year

??

Long term

Over 5 years

??

SOURCES OF FINANCE
LONG TERM

SHORT TERM

Share Capital

Bank overdrafts

Loans

Trade credit

Mortgages

Factoring

Retained profit
Leasing

Grants

TASK TIME
COMPLETE THE WORKSHEET PROVIDED BY
YOUR TEACHER

Long term
Finance

Long term Finance

Long term finance is either never repaid or repaid over
a long period of time (5-25 years)
Long term sources include:
Owners own capital/savings
Share capital
Loans
Mortgages
Retained profit
Grants

Owners Capital or savings

When the owner uses his or her own
savings to invest in the business. Usually
a sole trader will start up a business with
their own savings.

Owners capital
Advantages

Disadvantages

No debt incurred no
repayments or interest
payable

Opportunity cost (could

have been invested
elsewhere
Owner may not have
enough funds to meet the
financial needs of the
business

Share capital
A share in the business is sold to an
individual or another business. This
money is then used to purchase new
assets or to expand. The business
changes from a Ltd to a plc and shares
can be traded on the stock market.

Share-capital
Advantages

Disadvantages

No debts incurred (no

repayments and interest)
Some companies can raise
large sums of money this
way

Lose control of the

business (new owners)
Need to pay out more
profit to new owners

Loans
An amount of money is borrowed from
the bank and then repaid with interest
over a set period of time. The loan period
can range from 1 year to 10 years. Look
for the APR amount the higher the
APR the more interest is paid.

Bank loans
Advantages

Disadvantages

Easy and quick to set up

Interest in payable

Large amounts of money

Risk of collateral and bad
can be borrowed (helps
credit rating if loan is not
cash inflow)
repayed
Structured repayment
terms (helps cash outflow)

Retained profit
When a business makes a profit and keeps it rather
than spending it, it is called
RETAINED PROFIT

The retained profit is then available to use within

the business, for developing the business or for a
rainy day.

Retained profit

Advantages
Disadvantages
Business can expand Shareholders may be
without incurring any dissatisfied with dividends
debt
Opportunity cost (money
could have been invested
elsewhere)

Grants
Some businesses may get grants to help them start up
(especially small businesses).
Organisation such as the Princes Trust give business start
up grants to young people up to the age of 30.
Grants are also available from the government and the
European Union.
Grants DO NOT have to be repaid

Grants
Advantages

Disadvantages

Often no need to repay

government grants

Limited funds are available

May be restrictions on
what the money can be
used for

Selling Assets
Valuable items like land, buildings, machinery,
equipments etc, are sold and the money made
used to finance the business

Selling assets
Advantages

Disadvantages

Money using money that is Has to have something

already held in assets so
worth selling for this to be
no debt is incurred and
an option
interest repaid
The business may sell an
asset they later need

Mortgage Loans
Long term loan provided by a bank in order to
buy property

Mortgage
Advantages

Disadvantages

Only method available to

buy property
Structured payments over
a long term

Large sums of interest can

be charged
Can take a long time to
repay debt

Venture Capital
Venture capitalists invest in small, risky
business e.g. new business start ups

Venture capitalists
Advantages

Disadvantages

Can raise money from

The VC may want to have
them even when banks
some control over how the
have refused to lend to the business operates
business

Short term
Finance

Leasing
Businesses can rent equipment from other
companies rather than buying them. These
rental agreements are referred to as
LEASING
Can you think of any examples?

Leasing
Advantages

Disadvantages

Paid in small instalments

which helps cash inflow
Repairs and maintainance
carried out by the leasor,
so no extra costs
Leased item can be updated when lease is
renewed

May be more expensive

than buying the asset
The business does not own
the asset so does not
contribute to wealth

Short Term finance

Sources of money that has to be repaid either
immediately or fairly quickly, such as an
overdraft, paid back within a year.
Bank overdraft
Trade credit
Leasing
Factoring

Bank overdrafts
An overdraft facility is where you can
withdrawal more money than you actually
have in an account. An overdraft of 2,000
would let you go 2000 in the red which may
help a business in the short term.
Personal overdrafts tend to be between 1001000.

Over-draft
Advantages

Disadvantages

A good short-term solution Higher Interest rate is

to a cash flow problem
charged and has to be
repaid over a short period
Relatively quick and easy
Only suitable for smaller
to set up
amounts

Trade credit
TRADE CREDIT is when a supplier
allows you a period of time
(such as 30 days) to pay for goods
and services.
However, your customers may also
expect TRADE CREDIT so the
advantages of this can be cancelled
out!

Trade credit
Advantages

Disadvantages

Gives the business more

cash to use in the
immediate future

Can only be used to buy

certain goods

Bill usually has to be

settled in full within 30,60
or 90 days

Factoring
A source of finance where a business is able to
receive cash immediately for the invoices it has
issued from a FACTOR such as a bank instead of
waiting the typical 30 days to be paid.

A FACTOR is a financial service company like a

bank and they charge a fee for this service.

Factoring
Advantages

Disadvantages

Allows business to get

money for debts that
might otherwise never
have been paid
Saves the business time
chasing customers for
money owed

Time consuming to
arrange

The business received less

money than it was
originally owed this may
affect profitability