Topic 1 3 Putting a business idea into

Topic 1. 3 Putting a business idea into practice 1. 3. 4 Sources of business finance PRESENTATION Sources of small business finance Edexcel GCSE (9 -1) Business Dynamic Learning © Hodder & Stoughton

Topic 1. 3 Putting a business idea into practice 1. 3. 4 Sources of business finance PRESENTATION Sources of small business finance This section covers the following: • The key questions when raising finance • Sources of long-term finance • Sources of short-term finance Edexcel GCSE (9 -1) Business Dynamic Learning © Hodder & Stoughton

Topic 1. 3 Putting a business idea into practice 1. 3. 4 Sources of business finance PRESENTATION Key words (2) Trade capital • When a supplier provides goods but is willing to wait to be paid – for perhaps up to three months. This helps with cash flow. Venture capital • A combination of share capital and loan capital, provided by an investor willing to take a chance on the success of a small to medium-sized business. Edexcel GCSE (9 -1) Business Dynamic Learning © Hodder & Stoughton

Topic 1. 3 Putting a business idea into practice 1. 3. 4 Sources of business finance PRESENTATION The key questions when raising finance Finance is the money a business needs to start, run or expand. A source of finance is the type of finance that can be used by a business after asking: • How secure is the source? For example, an overdraft can be asked to be repaid by a bank at any time though a loan cannot. • How expensive is the source? For example, loans attract interest with the rate rising the riskier the loan is. • Is enough money being raised? For example, predicting cash flow is difficult and often requires more finance. Edexcel GCSE (9 -1) Business Dynamic Learning © Hodder & Stoughton

Topic 1. 3 Putting a business idea into practice 1. 3. 4 Sources of business finance PRESENTATION Long-term finance can be used for the following: • Provide start-up capital for a business. • Finance the purchase of assets with a long life, e. g. property purchases. • Expand the business such as increasing the size of a factory. Edexcel GCSE (9 -1) Business Dynamic Learning © Hodder & Stoughton

Topic 1. 3 Putting a business idea into practice 1. 3. 4 Sources of business finance PRESENTATION Short-term finance can be used for the following: • Survive periods of poor cash flow – such as for ice cream vendors when sales are lower in the winter • Bridge the gap between customer payments being received having to pay costs. • Provide cash for increased demand for products and money required to buy raw materials. Edexcel GCSE (9 -1) Business Dynamic Learning © Hodder & Stoughton

Topic 1. 3 Putting a business idea into practice 1. 3. 4 Sources of business finance PRESENTATION Key words Trade capital • When a supplier provides goods but is willing to wait to be paid – for perhaps up to three months. This helps with cash flow. Edexcel GCSE (9 -1) Business Dynamic Learning © Hodder & Stoughton

Topic 1. 3 Putting a business idea into practice 1. 3. 4 Sources of business finance PRESENTATION Short-term finance sources • • • Bank overdrafts: A bank grants the business the ability to take more money from its bank account than it has in return for charging a fee and interest until it is repaid. A benefit of an overdraft is that it is flexible. No payments are required on a regular basis and the business can pay the overdraft back partially or in full when there are enough funds. A drawback is the bank can demand payment in full within 24 hours. Trade credit: Where a supplier provides goods to a business and allows time for payment, e. g. 30 days. A benefit of trade credit is that it helps the business with cash flow, i. e. payment to suppliers can be made once the business has been paid for products. A drawback is that small businesses often struggle to get credit. Edexcel GCSE (9 -1) Business Dynamic Learning © Hodder & Stoughton

Topic 1. 3 Putting a business idea into practice 1. 3. 4 Sources of business finance PRESENTATION Key words Retained profit • Profit kept within the business (not paid out in dividends); this is the best source of finance for expansion. Edexcel GCSE (9 -1) Business Dynamic Learning © Hodder & Stoughton

Topic 1. 3 Putting a business idea into practice 1. 3. 4 Sources of business finance PRESENTATION Key words Venture capital • A combination of share capital and loan capital, provided by an investor willing to take a chance on the success of a small to medium-sized business. Edexcel GCSE (9 -1) Business Dynamic Learning © Hodder & Stoughton

Topic 1. 3 Putting a business idea into practice 1. 3. 4 Sources of business finance PRESENTATION Long-term finance sources • Personal savings: Business owners often use their own savings to show outside investors they are willing to take a risk with the new venture. • Retained profit: This is the profit that the business keeps aside • A benefit of retained profit is that there are no extra costs to financing the business, such as interest charges. • A problem with retained profit is that it is unavailable to new businesses. • Venture capital: This is where another business or individual will provide finance in a risky business in exchange for shares in the business and profits. • A benefit of venture capital is it is more likely to be granted to new businesses. • A drawback is the business must share in its ownership and/or profits. Edexcel GCSE (9 -1) Business Dynamic Learning © Hodder & Stoughton

Topic 1. 3 Putting a business idea into practice 1. 3. 4 Sources of business finance PRESENTATION Key words Share capital • Raising finance by selling partownership in the business. Shareholders have the right to question the directors and to receive part of the yearly profits. Edexcel GCSE (9 -1) Business Dynamic Learning © Hodder & Stoughton

Topic 1. 3 Putting a business idea into practice 1. 3. 4 Sources of business finance PRESENTATION Key words Dividends • Payments made to shareholders from the company’s yearly profits. The directors of the company decide how large a dividend payment to make; in a bad year, they can decide on zero. Edexcel GCSE (9 -1) Business Dynamic Learning © Hodder & Stoughton

Topic 1. 3 Putting a business idea into practice 1. 3. 4 Sources of business finance PRESENTATION Long-term finance: Share capital • Shares are an individual part of a business. • Ordinary shares give a buyer part ownership of a business, along with voting rights at the annual general meeting, and a share of the business profits, called a dividend. • Example: If a business is made up of 100 shares and an investor owns 10 shares, they own 10% of the business. If the business makes £ 200 profit and all of this amount is paid as dividends, then 10 shares would attract 10% of the profits, i. e. £ 20. • A benefit of share capital is once shares have been bought they can only be sold to someone else. The business cannot be forced to give money back. • A drawback is that the owner loses some control over the business depending on how many shares are owned by shareholders. Edexcel GCSE (9 -1) Business Dynamic Learning © Hodder & Stoughton

Topic 1. 3 Putting a business idea into practice 1. 3. 4 Sources of business finance PRESENTATION Long-term finance: Loans • Loans are money borrowed, usually from a bank, over a set period of time with the business paying part of the loan, plus interest, every month. • Interest and any repayment of the amount borrowed must be paid back on time or the whole loan might have to be repaid. • Business loans are normally secured on assets such as buildings or machinery. • Interest can be a fixed amount or vary. Edexcel GCSE (9 -1) Business Dynamic Learning © Hodder & Stoughton

Topic 1. 3 Putting a business idea into practice 1. 3. 4 Sources of business finance PRESENTATION Key words Crowdfunding • Raising capital online from many small investors (but not through the stock market) Edexcel GCSE (9 -1) Business Dynamic Learning © Hodder & Stoughton

Topic 1. 3 Putting a business idea into practice 1. 3. 4 Sources of business finance PRESENTATION Long-term finance: Crowdfunding • Crowdfunding means raising money to finance a business from small investors paying for a small share of the venture. • Crowdfunding often takes place via the internet. • A benefit of crowdfunding is that it allows entrepreneurs who cannot finance an idea conventionally to start a business. • A drawback is that two out of three ideas do not achieve the investment required. Edexcel GCSE (9 -1) Business Dynamic Learning © Hodder & Stoughton Kickstarter example

Topic 1. 3 Putting a business idea into practice 1. 3. 4 Sources of business finance PRESENTATION Summary questions Write down or discuss the answers to these questions. • A farmer needs to pay suppliers £ 500 for seeds which he can repay when he sells his crop two months later. Which source of finance would be the most suitable? Explain. • Give a benefit of shares as a source of finance. • What is crowdfunding? • Why might a new business be unable to get trade credit? Edexcel GCSE (9 -1) Business Dynamic Learning © Hodder & Stoughton