Sources of Finance Learning Objectives To understand how

Sources of Finance

Learning Objectives • To understand how to finance a business using external and internal methods • To understand how to improve profit

Start off… • Recap of Year 10 • Draw a diagram with everything you remember about business finance • What are the methods that a business can use to get finance?

You should have…. . Leasing Sale of Assets Share Capital Venture Capitalist Debt factoring Loans Mortgage Hire Purchase Sale & Leaseback Friends and Family Overdraft Debentures/Bonds Retained Profit Trade Credit Government Grants

Why do businesses need finance? • When setting up • Working capital – day to day running of the business • To finance growth • Unforeseen events – sudden decline in sales, large customer fails to pay for goods on time and finance is need to pay for expenses.

Borrowing Money Time frame Short term Under 1 year Medium term 1 -5 years Long term Over 5 years

Internal & External Sources of Finance • Internal – Finance that is obtained within the business • External – Finance that is obtained from outside the business

From your list…. • Group each method into – Short Term – Medium Term – Long Term • Is each method INTERNAL or EXTERNAL?

Short Term Medium Term Long Term Debt Factoring Loans Overdraft Leasing Share Issue Trade Credit Hire Purchase Debentures/Bonds Friends and Family Sale & Leaseback Government Grants Sale of Assets Retained Profits Mortgage Venture Capitalist

Internal Sources of Finance Retained Profit Sales of Assets

External Sources of Finance • Equity – Share Capital • Debt – Borrowing money – Overdrafts, Loans, Trade Credit, Bonds

External Sources of Finance • Short-term finance – – Debt factoring – a debt factoring company will pay to its client all or part of the value of an outstanding invoice and then organises the collection of debt. – Overdraft – The bank allows a firm to overdraw up to an agreed level – Trade credit – a firm obtains goods/services from another business but does not pay for it immediately. They may be given 30, 60 or 90 days to pay for them. – Friends and family loans

External Sources of Finance • For growth and expansion – – Bank loan – secured and unsecured Leasing Hire purchase Sales and leaseback – – Share issue Debentures/Bonds Long term loans Grants from the government

Which source of finance to use depends on… • Cost – Trade Credit – interest free – Retained Profit – interest free, but still a cost as money cannot be invested elsewhere – Borrowing money, loans, overdraft – interest has to be paid for the lifetime of the loan – Share – dividends to pay for the lifetime of the company, more shares = further the profit has to go round

• Risk – Retained profit & shares – risk free – don’t have to pay them – Loans or overdrafts – have to pay interest – cannot choose

• Availability of Finance – Retained Profit – excludes start up and businesses that have made a loss – Assets – can only sell assets if they own them – Loans – more established businesses – Debentures – very large companies – Trade Credit – amount depends on how much they spend – Much harder for smaller businesses to get finance