Obtaining finance

Lesson Objectives To understand the difference between internal and external finance. To be able to explain the main sources of finance. Understand difference between long term and short term finance.

Sources of finance Personal savings / Owners funds Retained profit Internal External Personal savings / Owners funds Retained profit Sale of assets Share Capital Venture capital Loans / Mortgage Overdraft facilities Hire purchase Trade Credit Grants

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

Short term Finance Short term finance is money that may have to be paid immediately or fairly quickly. (1 – 5 years) Short term sources include: Bank overdraft Trade credit Factoring

Owners capital (funds) Owner uses his or her savings and puts money into 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 Capitalist 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.

Bank Loan An amount of money is borrowed from the bank, 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.

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

Retained profits Money kept in the business by the owners. Known as retained profit on the balance sheet. The retained profit is then available to use within the business, for developing the business or for a ‘rainy day’.

Leasing These are known as rental agreements. Businesses can rent equipment from other companies rather than buying them.

Government grants Money given to the business by the government and European Union. Used to help finance new projects – especially those that create new jobs. 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 DO NOT have to be repaid

Bank Overdraft The bank allows the business to draw more money from their bank account than they actually have in it. An overdraft of £2,000 would let you go £2000 ‘in the red’ which may help a business in the short term. They have to pay interest.

Trade credit TRADE CREDIT is when a supplier allows you a period of time (such as 30 days) to pay for goods and services. Items are bought from suppliers on a ‘buy now pay later’ basis . 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. The company sells a debt it is owed to a debt factoring company who pay the business a smaller sum than they were owed.

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Recommending Finance   A family friend is thinking about setting up a business, and you must advise them on the most suitable types of finance available to them.   Create a 2 paged leaflet by hand, or using the PCs.   You may work in pairs BUT 1 piece of work per person must be handed in by the end of the lesson.

Page 1 – Give the details about the business Page 1 – Give the details about the business. Include: Business name Type of ownership – sole trader, partnership, Ltd Location   Page 2 - Select 3 different types of finance: Include: Definition Advantages and Disadvantages Examples of what the finance might be spent on

Lesson 2 Lesson Objectives To understand the difference between internal and external finance. To be able to explain the main sources of finance. Understand difference between long term and short term finance.

Lesson 3 To understand the sources of finance and apply knowledge to different scenarios.

Word scramble PITLACA STANRG ESAGNLI ONAL TAGEGORM TIFOPR TNEIDRAE RESREDAHLOH SERAHS RUTNEEV

Answers CAPITAL GRANTS LEASING LOAN MORTGAGE PROFIT RETAINED SHAREHOLDER SHARES VENTURE

Look at the 10 scenarios. For each scenario you must indentify: · Whether the business has Unlimited or Limited Liability · The most appropriate source(s) of finance · Whether the chosen source(s) of finance are internal or external sources of finance · Explain why you have chosen these sources of finance – try to match the appropriate form of finance against the organisation type.