Sources of Finance

Master sources of business finance! Explore options like loans, capital, and credit.

What is a bank overdraft? (1) When you borrow a fixed amount of money from the bank and pay it back over a fixed period of time. When the bank lets you spend money that you don't have, incurring a negative balance on your account. When you make a down payment for some goods and then pay the remainder in instalments. A cashless method of payment. What is an unsecured bank loan? (1) When you borrow a fixed amount of money and pay back over a fixed period of time along with interest. When you can spend more money than you have in your account, however interest is charged. When businesses buy resources and pay for them at a later date, usually 30-90 days. When businesses use resources (tools, property, machinery, land) in return for regular payments. Analysis of short-term sources of finance. Match up the short-term source of finance with its most likely advantage. Bank overdraft It's simple and flexible Unsecured bank loan The business knows exactly how much money to pay each month. Hire purchase Small businesses can buy needed resources with limited cash. Leasing The business is not responsible for maintenance or repair costs. Trade payables (trade credit) The business keeps its cash for longer. Put the short-term sources of finance in the left hand column and the long-term sources of finance in the right hand column. Short-term vs Long-term sources of finance. Short-term sources of finance (5) Bank overdraft Hire purchase Leasing Trade credit Credit card Long-term sources of finance (5) Owner's capital Share capital Debenture Venture capital Mortgage Which of the following businesses would use share capital in order to expand? In the text box for each image write 'yes' or 'no'. Yes No No Yes Yes No Fill in the gaps! Long-term finance is money borrowed for more than one year.External long-term funds can be in the form of capital or loans.The money that an entrepreneur invests themselves or borrows from family or friends is called owner's capital or personal savings.Limited companies can raise share capital by selling shares in the business to investors.One of the main benefits of funding using capital rather than loans is that you don't need to pay any interest on the funding you receive.Limited companies might choose to get loan funding from directors or other private investors. To do this they could sell them a debenture. The person who holds it would get interest payments and their money paid back over a set period of time but they would not have the right to vote or make decisions in the business.Short term bank loans are unsecured which means that the person borrowing the money does not need any collateral. Long term bank loans are known as mortgages and the borrower needs to secure the loan using land or property, it is paid back over 20-30 years.If a business can't get money from anywhere else because they are either just starting out and their business is considered too risky they can borrow money from a venture capitalist. These businesses will lend you money but they will want a percentage of your business.Businesses will quite often choose the cheapest source of finance. When weighing up which one is best financially they will look at the cost of interest payments and administration costs.Governments will sometimes give money to businesses to help them. They prefer to give money to businesses that set up in regions of high unemployment, small businesses and start-ups. What do we call the money that businesses need in order to buy things to help set up the business? (1) Working capital Start-up capital Bank loans Private equity What is this a definition of? 'The revenue gained from trading can be used to meet the day-to-day running costs of the business' (1) Start-up capital Operating capital Working capital Revenue capital Which of the following are examples of when a business might need emergency funding? (3) If the human resources are unhappy and demand more money If consumer demand falls rapidly and impacts on their cash flow If they have more money coming in rather than going out of the business If the revenue figures are better than expected If they have an unexpected infrastructure failure When they get given an unexpected tax bill Which of the following are likely to be bought for with start-up capital? (4) A van Business rates Machinery Land Telephone bill Gas and electricity Tax Water Premises Employee salaries Which of the following are examples of internal finance? (3) Credit card Bank overdraft Sale of assets Working capital Bank loan Hire purchase Retained profit What are the benefits of using internal finance? (3) It is cheaper It improves your relationship with the bank It is easier to arrange No fear of rejection It means that you can always make more money It helps to improve your credit rating It keeps the shareholders happy What is it called when a business sells items that it no longer needs in order to raise money? (1) Sale of assets Sale of machinery Sale of profits Sale of premises Sale of revenues Short-term finance is money that is borrowed for a short period of time and that is commonly used to give businesses more working capital - but how long is it borrowed for? (1) Three months or less Six months or less Twelve months or less Eighteen months or less What source of finance is it when the bank lets a business (or an individual) spend more money than they have in their account? (1) Bank loan Credit card Hire purchase Bank overdraft What source of finance is it when a business borrows a fixed amount of money which they then need to pay back over a fixed period of time (with interest)? (1) Bank overdraft Unsecured bank loan Hire purchase Leasing Debenture What source of finance is it when a business (or an individual) buys specific goods with a loan, formed of an initial down payment and then the remainder paid in instalments after which the buyer will own the asset? (1) Hire purchase Leasing Trade credit Credit card What source of finance involves someone renting or hiring equipment or property that they never actually own? (1) Hire purchase Trade credit Leasing Bank overdraft What source of finance involves businesses buying resources from their suppliers which they then pay for at a later date, usually 30-90 days later? (1) Credit card Leasing Hire purchase Trade credit What is the benefit of reducing the amount of trade credit that you give to your customers? (1) You have an improved relationship with them The number of customers you have will rise You get the money quicker Your products and services become more attractive to buyers What are the main benefits of using an agreed bank overdraft facility at your bank? (2) You can will eventually own the resources you buy It is quick to access It is flexible and can be used when needed You know exactly how much money you need to pay each month You keep your cash for longer Why is hire purchase a useful source of finance for smaller businesses? (2) Using the resources now enables them to make money and pay off the debt in instalments They own the goods from the time of purchase It is a simple and flexible source of finance They only pay interest on the borrowed money and then give the goods back when they are finished with them They can get the goods and use them now instead of having to save up and then buy them Why do some businesses prefer to use leasing as a source of finance? (4) They are not responsible for maintenance or repair costs It is the cheapest source of finance available to small businesses They can get up-to-date equipment It helps small businesses as they can keep their cash for longer It is easier to get than other forms of finance They can own the goods at the end of the leasing period They can take it with them when they go on business trips abroad They can use expensive equipment without having to buy it Venture capitalTends to be used by small and medium-sized firms that approach specialist investors for financial backing, in turn these investors will receive an equity stake in the business, gain some degree of control, share the profit and be able to influence decision-making.The objective of the venture capitalist is to help the original business owners grow the business and get it to a stage where the business can go public. At that point the venture capitalists would sell their shares and make a lot of profit.Individual venture capitalists are called ‘business angels’.Businesses often turn to venture capitalists after they have been refused by other sources although some businesses might turn to them willingly if they feel that the venture capitalist could provide them with the expertise that they need to take the business onto the next level more quickly.CrowdfundingThis is where a large number of individuals (the crowd) invest in a business venture using an online platform, such as 'Kickstarter'. These specialists websites allow businesses that need investment to post their business idea, how much cash they’ll need and how they’ll use it online, people will view the project and if they like it they can choose to invest. Sometimes the investors can invest relatively small amounts of money however if lots of people choose to invest then the business would be able to generate enough money to make the project a reality. The investors get shares in the business and can be the first people to get the finished product.