Transcript Document

Sources of business
finance
.
3 26
Why businesses need money
Businesses need extra money at times because:
 They are just starting and need to buy premises
and equipment.
 They have an opportunity to introduce a new
product or service.
 A major item of equipment or building needs to
be brought up to date.
3.26 Sources of business finance
The sources of funds 1
 Owner’s funds – savings of the owner – or an
additional mortgage taken out on their house.
 Profits – profits which have been retained and not
paid out as dividends.
 Loans – from a bank or other financial institution.
 Government grants – available for specific
reasons, eg expanding in a deprived area.
3.26 Sources of business finance
The sources of funds 2
 Hiring and leasing – this saves having to buy
expensive items outright as payments are
made in regular instalments.
 Issuing shares – only applies to public limited
companies whose shares are bought and sold
on the Stock Exchange.
 Selling assets – such as unwanted buildings
or spare land.
 Venture capital – finance from a company
which specialises in lending to successful small
businesses – often in exchange for shares.
3.26 Sources of business finance
Factors affecting the choice of funding
Advice
available
The amount
required
The cost of
the money
Choosing a
funding method
Loss of
control
The risk
involved
The length of time
for which the money
is needed
3.26 Sources of business finance
Making the choice 1 – internal sources
Source
Advantages
Disadvantages
Owner’s
funds
Owner keeps
control
Could lose
everything if
business fails
Retained Owner(s)
Reduces reserves
profit
make decision and possibly future
dividend payments.
May be insufficient
for needs.
3.26 Sources of business finance
Making the choice 2 – bank options
Source
Advantages
Disadvantages
Bank loan
Advice available.
Repaid over an
agreed period
Bank may refuse.
Repayments may
rise if interest rates
increase.
Overdraft
Cheaper than loan
for short-term
finance
Bank may refuse.
Only very short-term.
3.26 Sources of business finance
Making the choice 3 – other external sources
Source
Advantage
Disadvantage
Government
grant
May not need to be
repaid though
spending closely
checked
Saves paying ‘upfront’ for an asset.
Asset may belong
to business
eventually.
Complicated and
restricted to
certain
areas/reasons
Only useful for
obtaining assets.
Costs more than
outright
purchase.
Hiring and
leasing
3.26 Sources of business finance
Making the choice 4 – other external sources
Source
Advantage
Disadvantage
Issuing
shares
Large amounts
available, never
repaid
Only for plcs
Selling
assets
Converts unused
items into capital
Shareholders paid
dividends
Only appropriate if
have unused assets!
Venture
capital
Large amount may
be available +
advice
Owner may lose
some control over
business
3.26 Sources of business finance
Funding in the real world
The airline ‘Go’ was sold by British Airways in
2001 for £110 million. 43% of the shares were
held by 3i – a venture capital company.
In 2002, Easyjet bought Go for £374 million –
and financed the purchase by offering new
shares to existing shareholders.
Q. How much money did 3i make on the deal?
3.26 Sources of business finance
Which would you choose?
If you had to find the finance for:
 A fleet of new cars for sales staff?
 Short-term finance to pay a large bill one month?
 Long-term finance for a small, thriving IT firm?
 A company setting up in a deprived area?
 A plc which wants to expand abroad?
3.26 Sources of business finance
Were you right?
Answers
 Fleet of cars = hiring/leasing
 Short-term to pay a bill = bank overdraft
 Long-term for IT firm = venture capital
 Company in deprived area = government grant
 Plc expanding abroad = selling shares
3.26 Sources of business finance