Sources of business

finance

3 26
.

Why businesses need money

Businesses need extra money at times because:

They are just starting and need to buy premises

and equipment.

They have an opportunity to introduce a new

product or service.

A major item of equipment or building needs to

be brought up to date.

3.26 Sources of business finance

The sources of funds 1

Owners funds savings of the owner or an
additional mortgage taken out on their house.

Profits profits which have been retained and not

paid out as dividends.

Loans from a bank or other financial institution.

Government grants available for specific
reasons, eg expanding in a deprived area.

3.26 Sources of business finance

The sources of funds 2

Hiring and leasing this saves having to buy

expensive items outright as payments are made in
regular instalments.

Issuing shares only applies to public limited

companies whose shares are bought and sold on
the Stock Exchange.

Selling assets such as unwanted buildings or

spare land.

Venture capital finance from a company which

specialises in lending to successful small
businesses often in exchange for shares.
3.26 Sources of business finance

Factors affecting the choice of funding

Advice
available

The amount
required

The cost of
the money

Choosing a
funding method
Loss of
control
The length of time
for which the money
is needed

The risk
involved

3.26 Sources of business finance

Making the choice 1 internal sources

Source

Advantages

Disadvantages

Owners
funds

Owner keeps
control

Could lose
everything if
business fails

Retained Owner(s)
Reduces reserves
profit
make decision and possibly future
dividend payments.
May be insufficient
for needs.
3.26 Sources of business finance

Making the choice 2 bank options

Source

Advantages

Disadvantages

Bank loan

Advice available.
Repaid over an
agreed period

Bank may refuse.

Repayments may
rise if interest rates
increase.

Overdraft

Cheaper than loan

for short-term
finance

Bank may refuse.

Only very short-term.

3.26 Sources of business finance

Making the choice 3 other external sources

Source

Advantage

Disadvantage

Government
grant

May not need to be

repaid though
spending closely
checked

Complicated and
restricted to
certain
areas/reasons

Hiring and
leasing

Saves paying upfront for an asset.

Asset may belong
to business
eventually.

Only useful for

obtaining assets.
Costs more than
outright purchase.

3.26 Sources of business finance

Making the choice 4 other external sources

Source

Advantage

Disadvantage

Issuing
shares

Large amounts
available, never
repaid

Only for plcs

Selling
assets

Converts unused
items into capital

Only appropriate if
have unused assets!

Venture
capital

Large amount may

be available +
advice

Owner may lose

some control over
business

Shareholders paid
dividends

3.26 Sources of business finance

Funding in the real world

The airline Go was sold by British Airways in

2001 for 110 million. 43% of the shares were
held by 3i a venture capital company.
In 2002, Easyjet bought Go for 374 million
and financed the purchase by offering new
shares to existing shareholders.
Q. How much money did 3i make on the deal?

3.26 Sources of business finance

Which would you choose?

If you had to find the finance for:

A fleet of new cars for sales staff?

Short-term finance to pay a large bill one month?
Long-term finance for a small, thriving IT firm?
A company setting up in a deprived area?
A plc which wants to expand abroad?
3.26 Sources of business finance

Were you right?

Answers

Fleet of cars = hiring/leasing

Short-term to pay a bill = bank overdraft
Long-term for IT firm = venture capital
Company in deprived area = government grant
Plc expanding abroad = selling shares
3.26 Sources of business finance