Obtaining Finance Unit 1 Topic 1.3.6

Lesson Objectives Must learn: the main sources of finance for a small business starting-up Should learn: short- term sources of finance Could learn: long- term sources of finances in the context of a private limited company (Ltd)

Where can a new business obtain finance from? Starter Where can a new business obtain finance from?

Different Types of Finance

Sources of Finance

Why Do Businesses Need Finance?

Finance and Time

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 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 £100-£1000.

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!

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.

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 Venture capitalists Loans Mortgages Retained profit Leasing 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.

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.

Venture Capitalists A person or company who buys shares in a business that they hope will grow fast. In the long term, they will sell the shares at a profit and often reinvest in other companies.

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.

Selling assets When a business sells off fixed and current assets which it no longer needs in order to raise finance for new projects.

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’.

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?

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

Key Terms

Key Terms

Plenary

Plenary

Plenary

Homework