Unit 1 Topic 1.3.6

 Must learn: the main sources of finance for a small business starting-up  Should learn: short- term sources of finance  Could learn: long- term sources of finances in the context of a private limited company (Ltd)

Where can a new business obtain finance from?

Sources of money that has to be repaid either immediately or fairly quickly, such as an overdraft, paid back within a year.

 An overdraft facility is where you can withdrawal more money than you actually have in an account. An overdraft of £2,000 would let you go £2000 ‘in the red’ which may help a business in the short term.

 Personal overdrafts tend to be between £100-£1000.



TRADE CREDIT

and services. is when a supplier allows you a period of time (such as 30 days) to pay for goods  However, your customers may also expect advantages of this can be cancelled out!

TRADE CREDIT

so the

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.

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

When the owner uses his or her own savings to invest in the business. Usually a sole trader will start up a business with their own savings.

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.

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.

An amount of money is borrowed from the bank and 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.

When a business sells off fixed and current assets which it no longer needs in order to raise finance for new projects.

When a business makes a profit and keeps it rather than spending it, it is called

RETAINED PROFIT

The retained profit is then available to use within the business, for developing the business or for a ‘rainy day’.

Businesses can rent equipment from other companies rather than buying them. These rental agreements are referred to as LEASING Can you think of any examples?

 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 are also available from the government and the European Union.

 Grants DO NOT have to be repaid