Raising Finance AS Business Studies

Aims & Objectives Aim: Understand methods of raising finance. Define overdrafts and venture capitalist Explain different internal and external methods of raising finance Analyse internal and external methods of raising finance.

Starter Sole Trader Window Cleaner Write a type of legal structure/business on your post it note. Attach to your partners head, without them seeing. Your partner has to ask questions related to different legal structures/business to find out which one they are. You cannot ask questions using any of the legal structure key words. Sole Trader Window Cleaner

Raising Finance On your white boards, list as many different sources of finance for a start up business as you can.

Sources of Finance Bank Loan Family Savings Overdrafts Share Capital Venture Capitalist Retained Profit Sale of Assets

Internal & External Sources of Finance Internal Sources of Finance: Ones which come from the owners of the business. External Sources of Finance: Ones which come from outside the business.

Internal & External Sources of Finance List as many internal and external sources as you can: Internal Owners personal funds Retained profit Income from sale of business assets External Issue of new shares Bank loans Overdrafts Venture capital

Problem With Borrowing Interest Rate. % of total borrowed money that is paid back by the entrepreneur. £10,000 loan 5% interest rate £500 repaid in interest

Personal Sources of Finance Investment from personal sources. Collective memory game.

Advantages of Personal Sources of Finance Disadvantages of Personal Sources of Finance There’s no cost to using this money in terms of an interest rate It’s not strictly true there’s no cost to an owner using his/her own money. There’s the opportunity cist in terms of the alternative uses to which the money could have been put. An entrepreneur putting his/her own money into a business start-up is a sign of confidence. If they’re willing to put their own money at risk maybe others will? Most entrepreneurs have limited finance at the start which limits what the business can purchase. The entrepreneur doesn’t have to worry about the money being withdrawn, which could happen if the money was borrowed. New business start-ups are risky, so the entrepreneur could lose everything. There’s no risk of interference in decision making by a lender. Borrowing from friends or family can cause a strain on relationships if the business does not do well. The entrepreneur does not have to pay out anything from profits if he/she does not want to; it’s all available for reinvesting.   Borrowing from friends or family rarely means interest has to be paid Friends and family may be more willing to lend than other lenders.

External Sources of Finance - Overdrafts A temporary agreement which allows the business to draw out more money than is in its bank account, up to an agreed amount. Bank charges fees for using, and interest. Banks can withdraw at any time. Brainstorm in groups, the advantages/disadvantages of using an overdraft.

Overdrafts Advantages Disadvantages It is a flexible source of finance Can be used regularly It is quick and easy to arrange Good for short term raising of finance Expensive if used for long term raising of finance – due to interest rates. Fees for going over the overdraft limit are high Overdraft can be removed at short notice Non sustainable source of finance.

Venture Capitalists A professional investor usually another business, interested in high risk, high growth businesses, who will invest an amount into a business in return for shares, and returns.

Venture Capitalists http://www.youtube.com/watch?v=0uX0DWjyGOE 18.23 Decide in your groups on the advantages and disadvantages of using a venture capitalist to raise finance.

Venture Capitalists Advantages Disadvantages Large cash sums can be raised quickly. Gain expertise of the venture capitalist. Venture capitalist can bring new ideas and perspectives. Could lead to higher profits in the long run. Loss of part of the ownership of the firm. Loss of full decision making. Loss of profits to venture capitalist.

Plenary What is the difference between a loan and an overdraft? Define venture capitalist. Give two advantages of using a venture capitalist to raise finance. Give two disadvantages of using a venture capitalist to raise finance.