Business Finance Chapter 28

Why business activity requires finance? Setting up a business will require cash injections from the owner(s) to purchase essential capital equipment and possibly , premises. This is called start-up capital All businesses need to finance their working capital – the day-to-day finance needed to pay bills and expenses and to build up stocks

3- when business expand 4- Expansion can be achieved by taking over other businesses finance is needed to buy out the owners of the other firm 5- special situations often lead to a need of greater finance like: decline in sales or a large customer could fail to pay for goods 6- apart from purchasing fixed assets.

Start-up capital : the capital needed by an entrepreneur to set-up a business Working capital: the capital needed to pay fpr raw materials, day-to day running costs and credit offered to customers. In accounting terms: working capital = current assets – current liabilities Capital expenditure: the purchase of assets that are expected to last for more than one year , such as building and machinery. Revenue expenditure: spending on all costs and assets other than fixed assets and includes wages and salaries and materials bought for stock.

Where does finance come from? Internal money raised from the business’s own assets or from profits left in the business External money raised from sources outside the business

Internal source of finance Profits retained in business Sales of assets Reduction in working capital

External source of finance - short-term sources Bank overdraft Trade credit Debt factoring Medium-term sources: Hire purchase and leasing Long-term sources: Long-term bonds or debentures Grants Venture capital Micro-finance Crowd funding

Overdraft: bank agrees to a business borrowing up to an agreed limit as and when required Factoring: selling of claim over trade receivable a debt factor in exchange for immediate liquidity- only a proportion of the value of the debts will be received as cash. Hire purchase: an asset is sold to a company that agrees to pay fixed repayments over an agreed time period- the asset belongs to the company. Leasing: obtaining the use of equipment or vehicles and paying a rental or leasing charge over a fixed period, this avoid the need for the business to raise long-term capital to buy the asset, ownership remains with the leasing company.

Equity finance: permanent finance raised by companies though the sale of shares. Long-term loans: loans that do not have to be repaid for at least one year. Long-term bond or debentures: bond issued by companies to raise debt finance, often with a fixed rate of interest. Rights issue: existing shareholders are given the right to buy additional shares at a discounted price.

Debt finance has the following advantages: As no shares are sold the ownership of the company doesn’t change. Loans will be repaid eventually Lenders have no voting rights at the annual general meetings Interest charge is expense of the business and are paid out before corporation tax is deducted. The gearing of the company increases and this gives shareholders the chance of higher returns in the future.

Equity capital has the following advantages: It never has to be repaid, it’s permanent capital Dividends do not have to be paid every year , in contrast interest on loans must be paid when demanded by the lender.

Venture capital: risk capital invested in business start-ups or expanding small businesses that have good profit potential but do not find it easy to gain finance from other sources. Crowd funding: the use of small amounts of capital from a large number of individuals to finance a new business venture. Microfinance: providing financial services for poor and low-income customers who do not have access to banking services, such as loans and overdrafts offered by traditional commercial banks.

Business plan: a detailed document giving evidence about a new or existing business, and that aims to convince external lenders and investors to extend finance to the business. See table in page.427 - answer the activity 28.7 p.427 - check the business plan process advantages (page.428) - check table p. 428 , read it and explain using your own words.