1. 15 Business finance
© Malcolm Surridge and Andrew Gillespie 2016

2. Why Businesses need Capital
Capital is the money invested into a business either by its owners or by organizations such as banks.
Share capital is the money invested into a company by shareholders when they buy shares.
Loan Capital is money invested by a business as a result of borrowing

3. Why Businesses need Capital
A asset is any item owned by a business that can generate income for the enterprise.
Non-current assets are assets that a business expects to hold for one or more years. Such as property and vehicles.

4. When it is first started
The “start up” capital is the first money raised to start the business. Usually a small number to just get the business going.
Several ways to get start up capital, personal loan, personal savings, selling shares of the business….
In 1975, the 20-year-old Jobs and Wozniak set up shop in Jobs' parents' garage, dubbed the venture Apple, and began working on the prototype of the Apple I. To generate the $1,350 in capital they used to start Apple, Steve Jobs sold his Volkswagen microbus, and Steve Wozniak sold his Hewlett-Packard calculator.

5. When it Expands
A business may seek capital to increase sales, possibly through promotion. (marketing is expensive)
Enter new markets
Develop new products (R&D is not cheap)
Seek to take over another business.

6. Sources of finance for start-ups and expansion
Cambridge International AS and A Level Business
Sources of finance for start-ups and expansion
Start-up capital
Capital for expansion
Possible sources of finance include:
owner’s finance: savings, redundancy pay, etc.
money borrowed from friends and family
bank loans
funds invested by outsiders, for example, venture capitalists.
sale of shares (possibly using a Stock Exchange)
sale of non-current assets that are not used
loan capital – banks may be willing to lend for expansion
profits retained in the business from previous trading periods.
© Malcolm Surridge and Andrew Gillespie 2016

7. Loan Capital
Loan stock is long-term debt capital raised by a company for which interest is paid, usually half yearly and at a fixed rate. Holders of loan stock are therefore long-term creditors of the company.

8. Retained Profits
For any company, the amount of earnings retained within the business has a direct impact on the amount of dividends. Profit re-invested as retained earnings is profit that could have been paid as a dividend.

9. Venture Capital
Venture capital is money put into an enterprise which may all be lost if the enterprise fails. A businessman starting up a new business will invest venture capital of his own, but he will probably need extra funding from a source other than his own pocket. However, the term 'venture capital' is more specifically associated with putting money, usually in return for an equity stake, into a new business, a management buy-out or a major expansion scheme.

10. Venture Capital
The institution that puts in the money recognizes the gamble inherent in the funding. There is a serious risk of losing the entire investment, and it might take a long time before any profits and returns materialize. But there is also the prospect of very high profits and a substantial return on the investment. A venture capitalist will require a high expected rate of return on investments, to compensate for the high risk.

11. Share Capital
Share capital refers to the funds that a company raises in exchange for issuing an ownership interest in the company in the form of shares. There are two general types of share capital, which are common stock and preferred stock.

12. Why businesses need finance
Cambridge International AS and A Level Business
Why businesses need finance
To establish a new enterprise.
To expand an existing business.
Sources of finance may be used to:
purchase assets needed in production, e.g vehicles
provide cash for day-to-day spending.
© Malcolm Surridge and Andrew Gillespie 2016

13. Chapter 15

14. Working Capital
Working capital is the cash a business has for its day to day spending.
Current assets are items owned by a business that can be readily turned into cash. Examples include cash, money owed by customers and inventories.
Current liabilities are short term debts of a business usually repaid within one year. A business overdraft is an example.

15. 15.3

16. Revenue expenditure and capital expenditure
Capital expenditure money spent by a business or organization on acquiring or maintaining fixed assets, such as land, buildings, and equipment.
A revenue expenditure is an amount that is expensed immediately—thereby being matched with revenues of the current accounting period. Routine repairs are revenue expenditures because they are charged directly to an account such as Repairs and Maintenance Expense.

17. Cont.
The statement of financial position is another name for the balance sheet. It is one of the main financial statements and it reports an entity's assets, liabilities, and the difference in their totals.

18. Income Statement
An income statement is a financial statement that reports a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period.

19. 15.4

20. Internal Sources
Retained earnings refer to the percentage of net earnings not paid out as dividends, but retained by the company to be reinvested in its core business, or to pay debt. It is recorded under shareholders' equity on the balance sheet.
The sale of unwanted assets are compensated distribution of valuable property that can be tangible or intangible. In a typical business or private transaction involving a sale of assets, the seller gains ownership of some form of cash or its equivalent, while the buyer obtains ownership of the asset.

21. Internal Sources
A leaseback is an arrangement where the seller of an asset leases back the same asset from the purchaser. In a leaseback arrangement, the specifics of the arrangement are made immediately after the sale of the asset, with the amount of the payments and the time period specified. Essentially, the seller of the asset becomes the lessee and the purchaser becomes the lessor in this arrangement. Working capital is a measure of both a company's efficiency and its short-term financial health. Working capital is calculated as:
Working Capital = Current Assets - Current Liabilities

22. External Sources of Finance
An overdraft is an extension of credit from a lending institution when an account reaches zero. An overdraft allows the individual to continue withdrawing money even if the account has no funds in it or not enough to cover the withdrawal. Basically, overdraft means that the bank allows customers to borrow a set amount of money.
Many businesses use bank loans as a suitable part of their financial structure. ... While interest must be paid on the loan, there is no need to provide the bank with a share in the business. Interest rates may be fixed for the term, making it easier to forecast interest payments.

23. External
A debenture is a type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond to secure capital. Like other types of bonds, debentures are documented in an indenture. Venture capital generally comes from well-off investors, investment banks and any other financial institutions that pool similar partnerships or investments.
Though providing venture capital can be risky for the investors who put up the funds, the potential for above-average returns is an attractive payoff.

24. External
It represents the risk capital staked by the owners through purchase of a company's common stock(ordinary shares). The value of equity capital is computed by estimating the current market value of everything owned by the company from which the total of all liabilities is subtracted.

25. Microfinance
Microfinance refers to an array of financial services, including loans, savings and insurance, available to poor entrepreneurs and small business owners who have no collateral and wouldn't otherwise qualify for a standard bank loan.

26. External
Crowd funding is the practice of funding a project or venture by raising monetary contributions from a large number of people. Crowd funding is a form of crowdsourcing and of alternative finance. In 2015, it was estimated that worldwide over US$34 billion was raised this way.

27. Government Grants
Grants from the federal government are authorized and appropriated through bills passed by Congress and signed by the president. Grant authority varies among agencies. For example, the Small Business Administration (SBA) may distributegrants to nonprofit organizations in many of its counseling and training programs.

28. 15.5 Business finance
© Malcolm Surridge and Andrew Gillespie 2016

29. Sole Trader
A business in which one person provides the permanent finance.
They have full control of the business
Keep all the profits.
Unlimited Liability – the owners personal possessions and property can be taken to pay for the debts off the company.
Common business types – hairdressers, builders, retail shops etc

30. Partnerships
A business formed by two or more people to carry on business together, with shared capital investment and usually shared responsibilities.
Can have any number of partners (not usually more than 20-30)
Unlimited Liability
Business debts and errors are felt by all partners.
Most Partnerships have an agreement detailing what each partners rights, responsibilities and profits are.
Common Business – Law and accounting firms

31. Private Limited Company
A private limited company, or LTD, is a type of privately held small business entity. This type of business entity limits owner liability to their shares, limits the number of shareholders to 50, and restricts shareholders from publicly trading shares.

32. Public Limited Company
A public limited company (PLC) is the legal designation of a limited liability company which has offered shares to the general public and has limited liability. A PLC's stock is offered to the general public and can be acquired by anyone, either privately, during an initial public offering or through trades on the stock market.

33. Costs of Finance
Rate of interest: large loans require more risk. Lenders will price that in the interest they charge.
Cost of selling shares: lots of administrative costs and promotion. As well as losing ownership of the business if the business appreciates.

34. Cost of Finance Opportunity Cost: the next best alternative.
A sale leaseback for example might look good but then the company has to pay back monthly payments for an extended period of time.
Flexibility: Some are more flexible than others. - Government grants usually come with very strict rules and regulations.

35. Cost of Finance
Control: probably the most important for the owner. Some sources give ownership away of the business. If you lose 51% you lose the controlling interest in the company.

36. Level of Existing Debt
If a business has a lot of debt it will be increasingly difficult to get more financing.

37. 15.6 Business finance
© Malcolm Surridge and Andrew Gillespie 2016

38. Choosing a Source
Creditors are individuals or organizations to whom the business owes money.
Business’s financial situation: is the business profitable? Can show creditors they will get their money back!
Business reputation: is the business reliable and popular. Can help when negotiating loans.

39. Choosing a Source
Legal structure: depending on the type of business can affect the ability to get finance.
Business environment: sales and markets are growing could be easy. On the other hand if interest rates are high making a loan might be very expensive.

40. Sources of Finance
The most important thing when thinking about sources of finance is proving to the creditors that you can pay them back.
Think about is someone wanted to borrow money from you. What would be the metrics that you would use to determine if this is a good person to lend your money too??