ITFT- Accounting & Finance
Sources of Business Finance
- 1. Sources of business finance
- 2. Why businesses need money 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. Businesses need extra money at times because:
- 3. The sources of funds 1 Owners 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.
- 4. 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.
- 5. The amount required Factors affecting the choice of funding The length of time for which the money is needed The risk involved The cost of the money Loss of control Advice available Choosing a funding method
- 6. Making the choice 1 internal sources Source Advantages Disadvantages Owners funds Owner keeps control Could lose everything if business fails Retaine d profit Owner(s) make decision Reduces reserves and possibly future dividend payments. May be insufficient for needs.
- 7. 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.
- 8. Making the choice 3 other external sources Source Advantage Disadvantage Governmen t grant May not need to be repaid though spending closely checked Complicated and restricted to certain areas/reasons Hiring and leasing Saves paying up-front for an asset. Asset may belong to business eventually. Only useful for obtaining assets. Costs more than outright purchase.
- 9. Making the choice 4 other external sources Source Advantage Disadvantage Issuing shares Large amounts available, never repaid Only for plcs Shareholders paid dividends Selling assets Converts unused items into capital Only appropriate if have unused assets! Venture capital Large amount may be available + advice Owner may lose some control over business