Internal Finance

Personal savings may include redundancy payments.

Once this money is gone......

Retained profits

Retained profit is the profit kept in the company rather than paid out to shareholders as a dividend. 

Retained profit is widely regarded as the most important long-term source of finance for a business.

Unwanted assets may include vehicles or computer equipment.

Sale and leaseback

Where a business sells a major asset then leases (rents) the same asset back from the new owner in order to raise finance.

External Finance

Sources of External Finance:

1. Family and friends.

Advantages / Disadvantages of using family and friends. Details here.

2. Banks

Advantages / Disadvantages of using a bank loan. Details here.

3. Peer-to-peer lending (P2PL)

The practice of lending money to individuals or businesses through online services that match lenders with borrowers. 

The lender's investment is not normally protected by any government guarantee.

Advantages / Disadvantages of Peer to Peer lending. Details here.

4. Business Angels

Individuals who use their personal wealth to provide capital to start-up early-stage businesses in return for a share of the company’s equity.

They tend to be entrepreneurial by nature and are prepared to take a high personal risk.

Click on the picture:

They hope that in due course they will be able to secure a profitable exit and see a return on their investment.

As well as capital, business angels may also bring valuable business and professional experience. 

Advantages / Disadvantages of Business Angels. Details here.

5. Crowd funding

The practice of funding a project or venture by raising money from a large number of people who each contribute a relatively small amount, typically via the Internet.

Types of crowd funding. Details here.

Advantages / Disadvantages of crowd funding. Details here.

6. Other businesses (Joint venture)

A commercial enterprise undertaken jointly by two or more parties which otherwise retain their distinct identities.

Advantages /Disadvantages of joint ventures. Details here.

Methods of Finance

Loans:

A thing that is borrowed, especially a sum of money that is expected to be paid back with interest.

"Borrowers can take out a loan for £84,000"

Usually provided by banks.

Short term: 1 - 2 years.

Medium term: 2 - 5 years.

Long term: % 5+ years.

Usually secured by collateral.

Interest payable may be fixed or variable. 

If interest rates increase this could be very damaging to a struggling business.

Share capital:

Share capital is the money invested in a company by the shareholders. Share capital is a long-term source of finance.

In return for their investment, shareholders gain a share of the ownership of the company.

Private limited company (Ltd): Can exchange shares for cash.

From private investors, business angels or venture capital businesses.

When this happens the original owners have less equity (share capital).

Public limited company (plc)

These are ltd businesses which have 'floated' on the London Stock Exchange, or smaller Alternative Investment Market (AIM).

Allowing greater ownership of the business can raise vast amounts of money.

Venture capital:

Businesses that invest in smaller, riskier businesses

which are established but are struggling to grow.

Large investments (£1m+ typically) in return for a large percentage of ownership. 

Advantages / disadvantages of VC here.

Differences between Business Angels and Venture Capital from 1.49:

Overdrafts:

A facility that allows a business to become 'overdrawn'. (This means having a minus amount in a bank account).

Each overdraft will have a fixed limit.

There are severe financial penalties for exceeding this limit.

Interest is charged on a daily basis when a business is overdrawn.

An overdraft is the most common external source of finance.

Advantages / disadvantages of an overdraft facility here.

Leasing:

When cash flow is an issue, leasing an expensive vehicle or piece of equipment may be a better option than buying it.

Leasing is the equivalent to renting.

There will be a fixed monthly fee.

Over the life of the item the business may end up paying more - but it saves a large initial payment.

Advantages / disadvantages of leasing here.

Trade credit:

Buying stock or other items but not paying for an agreed number of days.

Advantages / disadvantages of trade credit here.

Grants:

Free money from central or local government or the EU.

Usually limited to certain industries (green technology) or location (areas of high unemployment).

Very difficult to get with lots of time consuming paperwork to complete.

Liability and Finance

Unlimited liability

Sole traders and ordinary partnerships have unlimited liability.

There is no difference in law between the individual and the business.

Unlimited liability refers to the legal obligations general partners and sole proprietors have.

They are liable for all business debts if the business can't pay its liabilities.

Creditors can take individuals to court to recover debts.

Bailiffs can recover amounts that are owed from peoples personal belongings.

If people cannot pay they can be made bankrupt.

See: https://youtu.be/sc6n3u1kWbE 

Limited liability:

The legal duty to pay debts is the responsibility of the business not the owners.

Applies to a ltd and a plc.

Finance appropriate for unlimited liability businesses:

NOT SHARE CAPITAL (EQUITY).

1. Owners capital

2. Bank finance

3. Leasing

4. Trade credit

and the most important source of finance which is retained profit.

Finance appropriate for limited liability businesses:

1. Share capital

2. Bank finance

3. Angel or venture capital investment

4. Peer-to-peer lending or crowdfunding

5. Leasing and trade credit

and the most important source of finance which is retained profit.

Developing Business Plans

                           

A business plan: 

A report detailing the marketing strategy, production costings and financial implications of a business start-up.

       Contents of a business plan:

Relevance of a business plan in obtaining finance:

A thorough and well written business plan is likely to:

Force business owners to work out if the business is viable.

Provide a plan for future actions.

Identify any potential problems.

Help convince potential lenders that the business idea and owners are credible.

A well written plan reduces risk to a bank or potential investors.

A convincing business plan allows the entrepreneur access to a wider range of finance.

The interest rate on loans may be lower.

The entrepreneur may be able to give up a smaller percentage of shares to a business angel or a venture capital firm.

When the business idea and owners are not credible:

From the examiners:

   

More details on writing a business plan here.

Sources of information and guidance.

The sources of information should include: small business advisors, accountants, bank managers and government agencies.

More pages for 2.1 available. Click on 'Older Posts' below.