Sources of Finance D1 Sources of finance How many
Description: Sources of Finance D1 Sources of finance How many possible sources of finance can you list for a business? Try to think of both internal and external sources. Sources of Finance In this topic you will learn about Advantages, disadvantages,
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slide1. Sources of Finance D1
Sources of finance How many possible sources of finance can you list for a business?
Try to think of both internal and external sources.<br>
slide2. Sources of Finance In this topic you will learn about
Advantages, disadvantages, short term and long term:
Internal :
Retained profit
Net current assets
Sale of assets
External:
Owner’s capital
Loans
Crowd-funding
Mortgages
Venture capital
Debt factoring
Hire purchase
Leasing
Trade credit
Grants
Donations
Peer to peer lending
Invoice discounting<br>
slide3. Sources of finance Sources of finance are the options available to a business when seeking to raise funds to support future business actions
For a start-up business this might be raising sufficient capital to establish the business
For an established business this might be to fund growth or implement a new strategy e.g. relocation
Sources of finance can be:
Internal i.e. from within the business
e.g. retained profit
External i.e. from outside of the business
e.g. loans<br>
slide4. Internal finance Internal sources of finance include:
Retained profit
Net current assets
Sale of assets<br>
slide5. Retained profit Profit kept within a business from profit for the year to help finance future activities
Retained profit can be used as a short term source e.g. to fund day to day activities or accumulated over time and used as a long term source Stagecoach reinvests £80m profit in 470 new buses.<br>
slide6. Net current assets Current assets are items of value owned by a business that will be used and change in value within a year
Inventory
Trade receivables
Cash and cash equivalents
Current liabilities are items owed by a business that are to be repaid within a year
Trade payables
Overdrafts
Net current assets = current assets – current liabilities<br>
slide7. Sale of assets Sale of assets refers to the sale of a long term or fixed assets
Fixed assets will stay in the business for more than a year e.g. machinery and vehicles
These assets can be sold in order to get an immediate injection of cash in to a business and thereby provide finance
The benefits are:
No interest charges or repayments
May be turning an obsolete asset into finance
Immediate lump sum cash injection
However:
May be expensive in the long run if need to lease the asset back
Loss of use of the asset and future value
Is only a one off option Is selling assets an effective way of raising finance for Tesco?<br>
slide8. Internal finance Internal sources of finance include:
Retained profit
Net current assets
Sale of assets In pairs.
Explain, with the use of a business example, when each of these sources of finance is appropriate.
Try to consider:
the business form e.g. sole trader, partnership or Ltd
the financial performance of the business
the length of trading e.g. start-up or established<br>
slide9. External finance External finance is capital raised from outside of the business<br>
slide10. Owner’s capital Owner’s capital is how much the owner has invested in the business
Owner’s capital shows the proportion of the business’ assets that are owned by the business owner rather than creditors
Owner’s capital can be from:
personal savings e.g. an entrepreneur setting up as a sole trader or partnership
share capital when a business sells shares in return for part ownership in the business<br>
slide11. Owner’s capital: personal savings The benefits are:
Do not have to repay
No interest charges
Owner(s) maintain control
Risking own savings can be motivational
Do not have to go through any lengthy application procedures
However:
May only be limited amounts available
Threat to personal finances and family To what extent should all entrepreneurs invest some of their own savings in a new business venture?<br>
slide12. Share capital Finance raised from the sale of shares
This is a form of equity capital i.e. the shareholder becomes a part owner of the business
Shareholders will be rewarded for their investment by the payment of dividends but may also benefit from an increase in share price increasing the value of their shares
Only an option for incorporated businesses i.e. Ltds and Plcs
Issuing shares is a complex and costly process so only really an option for raising large amounts of finance to fund long term projects<br>
slide13. Share capital Why has Sony’s share prices fallen following an announcement to issue more shares?<br>
slide14. Loans A set amount of money provided for a specific purpose, to be repaid with interest, over a set period of time
May be secured against an asset and if there is a default on repayments the asset can be taken
Financial institutions can vary interest rates depending upon the amount of risk placed on the loan
An external source of finance generally considered to be more suitable for longer-term projects
However this will depend upon the size of the loan and the repayment period<br>
slide15. Loans<br>
slide16. Crowd-funding Crowd-funding involves raising finance from a large number of people each investing different, often small, amounts of money
The business uses the internet to explain how much money is required, how it will be used and the exit strategy stating predicted return on the investment
The investor is only tied into their promised contribution if the total amount is raised How does crowd-funding work?<br>
slide17. Mortgages Reread your notes on mortgages as a type of personal borrowing
In pairs
Write a definition
Produce a table of advantages and disadvantages
Justify whether it is a short or long term source of finance<br>
slide18. Venture capital Investment from an established business into another business in return for a percentage equity in the business
Also known as private equity finance
Venture capitalists will normally look for a high rate of return in a specific time period
The business or entrepreneur may also benefit from expertise and mentoring from the venture capitalist
Often associated with high risk start-ups Why might a Bitcoin start-up opt to use venture capital as a source of finance?<br>
slide19. Venture capital<br>
slide20. Debt factoring The process of selling the debts owed to a business to a financial institution
The business will receive funds immediately but at a reduced rate e.g. may only receive 80% of the total value of the debt
After the debt has been paid the business will receive further payment but the financial institution will keep a percentage of the repayment as a fee
An external source of finance<br>
slide21. Debt factoring Check your understanding of factoring.<br>
slide22. Hire purchase Allows a business to enjoy the use of an asset whilst paying for it in regular instalments
The asset remains the property of the seller up until the point where all instalments have been made at which point it becomes the property of the buyer
Avoids one off lump sum payments
Interest will normally be charged on top of the cost of the asset<br>
slide23. Leasing Leasing allows a business to benefit from the use of an asset without owning it or buying it outright
The business pays a set amount in instalments to lease the asset for a pre determined period of time
The asset remains the property of the leasing company and at the end of the time period the asset is returned to the lease company and the business stops making the payments
Avoids the need to finance the asset but may be more costly in the long run
However the lease company is responsible for any repairs and maintenance
At the end of the lease period the business may start a new lease agreement for the latest model e.g. new spec photocopier!<br>
slide24. trade credit Trade credit is paying suppliers a period of time after the goods or services have been received
In effect the supplier is providing the business with finance for the period of the trade credit e.g. 30 days
The business may lose out on discounts offered for immediate or quick payment increasing costs<br>
slide25. grants Grants are fixed amounts of capital provided to business by the government or other organisations to fund specific projects
Often conditions are attached to the grants for example:
Locate in an area of high deprivation
Provide employment
Reduce negative environmental impacts
Support a good cause What grants are available for small businesses in the UK?<br>
slide26. Donations Finance provided by an individual or organisation to support the activities of another organisation
Normally only available to non-profit organisations such as charities and social enterprises
Relies on the generosity of others
May be severely cut at times of economic difficulties
Have to ensure the cost of recieving the donations does not outweigh the amount received in donations!<br>
slide27. Peer to peer lending Peer-to-peer lending (P2P)
The practise of an individual lending to other individuals (peers) with whom there is no relationship or contact
Borrowers are given a credit rating
Normally an unsecured personal loan although on some occasions collateral may be offered
Cuts out the use of traditional intermediaries e.g. banks
Lending is done online
Lenders decide who they want to lend to then compete to win the lending opportunity in a reverse auction i.e. the lender willing to offer the lowest interest rate wins
The lenders motive is profit Visit Zopa.com to find out more about P2P lending.<br>
slide28. Invoice discounting Business may be able to negotiate a discount on invoices from suppliers
This in affect reduces costs, hence freeing up finance for other purposes
This may be achieved as a result of early payment or bulk buying
Although finance is received helping cash flow in the short term this may have a negative effect on profitability inn the longer term<br>
slide29. Finance In pairs produce a spider diagram of all the possible reasons why a business will need finance
Use high lighter to colour code them between short term and long term needs
In each case state an appropriates source Finance Pay wages Buy machinery<br>
slide30. Activity In pairs draw a table 17 rows by and 5 columns
Row 1 headers Source of finance, advantages, disadvantages, short term or long term, justification of short term or long term
Column 1 use the specification of the last slide to list all the sources of finance
Use your notes and further research to complete the table<br>
slide31. In this topic you have learnt about
Advantages, disadvantages, short term and long term:
Internal :
Retained profit
Net current assets
Sale of assets
External:
Owner’s capital
Loans
Crowd-funding
Mortgages
Venture capital
Debt factoring
Hire purchase
Leasing
Trade credit
Grants
Donations
Peer to peer lending
Invoice discounting Sources of Finance<br>
Sources of finance How many possible sources of finance can you list for a business?
Try to think of both internal and external sources.<br>
slide2. Sources of Finance In this topic you will learn about
Advantages, disadvantages, short term and long term:
Internal :
Retained profit
Net current assets
Sale of assets
External:
Owner’s capital
Loans
Crowd-funding
Mortgages
Venture capital
Debt factoring
Hire purchase
Leasing
Trade credit
Grants
Donations
Peer to peer lending
Invoice discounting<br>
slide3. Sources of finance Sources of finance are the options available to a business when seeking to raise funds to support future business actions
For a start-up business this might be raising sufficient capital to establish the business
For an established business this might be to fund growth or implement a new strategy e.g. relocation
Sources of finance can be:
Internal i.e. from within the business
e.g. retained profit
External i.e. from outside of the business
e.g. loans<br>
slide4. Internal finance Internal sources of finance include:
Retained profit
Net current assets
Sale of assets<br>
slide5. Retained profit Profit kept within a business from profit for the year to help finance future activities
Retained profit can be used as a short term source e.g. to fund day to day activities or accumulated over time and used as a long term source Stagecoach reinvests £80m profit in 470 new buses.<br>
slide6. Net current assets Current assets are items of value owned by a business that will be used and change in value within a year
Inventory
Trade receivables
Cash and cash equivalents
Current liabilities are items owed by a business that are to be repaid within a year
Trade payables
Overdrafts
Net current assets = current assets – current liabilities<br>
slide7. Sale of assets Sale of assets refers to the sale of a long term or fixed assets
Fixed assets will stay in the business for more than a year e.g. machinery and vehicles
These assets can be sold in order to get an immediate injection of cash in to a business and thereby provide finance
The benefits are:
No interest charges or repayments
May be turning an obsolete asset into finance
Immediate lump sum cash injection
However:
May be expensive in the long run if need to lease the asset back
Loss of use of the asset and future value
Is only a one off option Is selling assets an effective way of raising finance for Tesco?<br>
slide8. Internal finance Internal sources of finance include:
Retained profit
Net current assets
Sale of assets In pairs.
Explain, with the use of a business example, when each of these sources of finance is appropriate.
Try to consider:
the business form e.g. sole trader, partnership or Ltd
the financial performance of the business
the length of trading e.g. start-up or established<br>
slide9. External finance External finance is capital raised from outside of the business<br>
slide10. Owner’s capital Owner’s capital is how much the owner has invested in the business
Owner’s capital shows the proportion of the business’ assets that are owned by the business owner rather than creditors
Owner’s capital can be from:
personal savings e.g. an entrepreneur setting up as a sole trader or partnership
share capital when a business sells shares in return for part ownership in the business<br>
slide11. Owner’s capital: personal savings The benefits are:
Do not have to repay
No interest charges
Owner(s) maintain control
Risking own savings can be motivational
Do not have to go through any lengthy application procedures
However:
May only be limited amounts available
Threat to personal finances and family To what extent should all entrepreneurs invest some of their own savings in a new business venture?<br>
slide12. Share capital Finance raised from the sale of shares
This is a form of equity capital i.e. the shareholder becomes a part owner of the business
Shareholders will be rewarded for their investment by the payment of dividends but may also benefit from an increase in share price increasing the value of their shares
Only an option for incorporated businesses i.e. Ltds and Plcs
Issuing shares is a complex and costly process so only really an option for raising large amounts of finance to fund long term projects<br>
slide13. Share capital Why has Sony’s share prices fallen following an announcement to issue more shares?<br>
slide14. Loans A set amount of money provided for a specific purpose, to be repaid with interest, over a set period of time
May be secured against an asset and if there is a default on repayments the asset can be taken
Financial institutions can vary interest rates depending upon the amount of risk placed on the loan
An external source of finance generally considered to be more suitable for longer-term projects
However this will depend upon the size of the loan and the repayment period<br>
slide15. Loans<br>
slide16. Crowd-funding Crowd-funding involves raising finance from a large number of people each investing different, often small, amounts of money
The business uses the internet to explain how much money is required, how it will be used and the exit strategy stating predicted return on the investment
The investor is only tied into their promised contribution if the total amount is raised How does crowd-funding work?<br>
slide17. Mortgages Reread your notes on mortgages as a type of personal borrowing
In pairs
Write a definition
Produce a table of advantages and disadvantages
Justify whether it is a short or long term source of finance<br>
slide18. Venture capital Investment from an established business into another business in return for a percentage equity in the business
Also known as private equity finance
Venture capitalists will normally look for a high rate of return in a specific time period
The business or entrepreneur may also benefit from expertise and mentoring from the venture capitalist
Often associated with high risk start-ups Why might a Bitcoin start-up opt to use venture capital as a source of finance?<br>
slide19. Venture capital<br>
slide20. Debt factoring The process of selling the debts owed to a business to a financial institution
The business will receive funds immediately but at a reduced rate e.g. may only receive 80% of the total value of the debt
After the debt has been paid the business will receive further payment but the financial institution will keep a percentage of the repayment as a fee
An external source of finance<br>
slide21. Debt factoring Check your understanding of factoring.<br>
slide22. Hire purchase Allows a business to enjoy the use of an asset whilst paying for it in regular instalments
The asset remains the property of the seller up until the point where all instalments have been made at which point it becomes the property of the buyer
Avoids one off lump sum payments
Interest will normally be charged on top of the cost of the asset<br>
slide23. Leasing Leasing allows a business to benefit from the use of an asset without owning it or buying it outright
The business pays a set amount in instalments to lease the asset for a pre determined period of time
The asset remains the property of the leasing company and at the end of the time period the asset is returned to the lease company and the business stops making the payments
Avoids the need to finance the asset but may be more costly in the long run
However the lease company is responsible for any repairs and maintenance
At the end of the lease period the business may start a new lease agreement for the latest model e.g. new spec photocopier!<br>
slide24. trade credit Trade credit is paying suppliers a period of time after the goods or services have been received
In effect the supplier is providing the business with finance for the period of the trade credit e.g. 30 days
The business may lose out on discounts offered for immediate or quick payment increasing costs<br>
slide25. grants Grants are fixed amounts of capital provided to business by the government or other organisations to fund specific projects
Often conditions are attached to the grants for example:
Locate in an area of high deprivation
Provide employment
Reduce negative environmental impacts
Support a good cause What grants are available for small businesses in the UK?<br>
slide26. Donations Finance provided by an individual or organisation to support the activities of another organisation
Normally only available to non-profit organisations such as charities and social enterprises
Relies on the generosity of others
May be severely cut at times of economic difficulties
Have to ensure the cost of recieving the donations does not outweigh the amount received in donations!<br>
slide27. Peer to peer lending Peer-to-peer lending (P2P)
The practise of an individual lending to other individuals (peers) with whom there is no relationship or contact
Borrowers are given a credit rating
Normally an unsecured personal loan although on some occasions collateral may be offered
Cuts out the use of traditional intermediaries e.g. banks
Lending is done online
Lenders decide who they want to lend to then compete to win the lending opportunity in a reverse auction i.e. the lender willing to offer the lowest interest rate wins
The lenders motive is profit Visit Zopa.com to find out more about P2P lending.<br>
slide28. Invoice discounting Business may be able to negotiate a discount on invoices from suppliers
This in affect reduces costs, hence freeing up finance for other purposes
This may be achieved as a result of early payment or bulk buying
Although finance is received helping cash flow in the short term this may have a negative effect on profitability inn the longer term<br>
slide29. Finance In pairs produce a spider diagram of all the possible reasons why a business will need finance
Use high lighter to colour code them between short term and long term needs
In each case state an appropriates source Finance Pay wages Buy machinery<br>
slide30. Activity In pairs draw a table 17 rows by and 5 columns
Row 1 headers Source of finance, advantages, disadvantages, short term or long term, justification of short term or long term
Column 1 use the specification of the last slide to list all the sources of finance
Use your notes and further research to complete the table<br>
slide31. In this topic you have learnt about
Advantages, disadvantages, short term and long term:
Internal :
Retained profit
Net current assets
Sale of assets
External:
Owner’s capital
Loans
Crowd-funding
Mortgages
Venture capital
Debt factoring
Hire purchase
Leasing
Trade credit
Grants
Donations
Peer to peer lending
Invoice discounting Sources of Finance<br>