1. Suitable Sources of Finance Mrs Hunter
P4 – Unit 2 Assignment 2.3
Suitable Sources of Finance
Mrs Hunter

2. NO IDEA
I NEED HELP
NEVER HEARD OF IT OK
I CAN DO THIS WITH SUPPORT
SOME GUIDANCE NEEDED
NEARLY AT MY TARGET
GOT IT!
VERY CONFIDENT WILL HIT MY TARGET GRADE
EXCEED TARGET
LEARNING OBJECTIVES
Explore the suitable sources of finance for Billy the painter and decorator
Success Criteria P4
(All) Define all suitable sources of finance looking at whether these are internal or external.
Recommendations +
Quality of written and verbal communication and SPAG

3. Sources Of Finance Internal Sources of Finance
Funds obtained from sources within the business
External Sources of Finance
Funds obtained from sources outside the business

5. Time Periods for Finance
1 month
Short Term
Payable within a year
Medium Term
1-5 years
Long Term
5 years +
10 years

6. Internal Sources of Finance
(Finance generated within the business)

7. The need for finance To being trading. (start-up costs)
In order to operate (running costs)
Cash flow problems
Expansion / Growth
Funding extra working capital

8. Owners’ Capital
Applies to most small businesses i.e. sole traders and partnerships
Includes savings, redundancy pay ect.
Owners are at risk of loosing their money.

9. Retained Profit
Reinvesting profit avoids paying interest, with monthly re-payments.
NOT popular with shareholders, who receive a lower dividend as a result.
The business needs to be making a healthy profit in order to do this... and this still may not be enough!

10. Selling Assets
A business could sell assets such as land, property or equipment.
It makes sense IF they are no longer in use and not required.
Selling assets usually occurs when all other means have failed!

11. Rover MG Sells All Its Assets
Administrators say they will push on with plans to sell MG Rover's assets, after the firm collapsed leaving debts of £1.4bn
Why did this happen?
Could this have been prevented?
What other attempts do you think Rover could have made in order to recover?

12. Tighter Trade Credit
Reduce the length of time an outstanding bill can be paid.
Putting pressure on clients to pay early.
Can damage relationships with customers.

13. Reduce Stock Levels A large amount of money maybe tired up in stock.
Stock and materials are usually paid for well before they are turned into products.
In danger of being unable to meet a sudden influx in demand.
Loss of orders
Bad Reputation

14. Summary Owners Capital – Savings, Redundancy pay ect
Retained Profit – Reinvesting or holding back profit to put back into the business
Selling Assets – Selling equipment or property to raise funds
Tighter Trade Credit – Reducing length of time customers have to settle the bill
Reducing Stock Levels – Buying less stock

15. Homework - Questions
What is meant by ‘Internal Source of Finance?’ (1)
Why might
a) new business need finance? (3)
b) an existing business need finance? (3)
Explain how retained profit can be used to finance a business? (5)

16. Choice of finance Small Businesses Medium sized businesses
Sole Trader
Small Businesses
Medium sized businesses
Large corporations
PLC

17. External Sources of Finance
(Finance obtained from sources outside the business)

18. Family and Friends Associated with a sole trader or partnership.
Low cost finance in terms of interest
Little or no security required.
This type of finance is usually quite small.

19. Loans
Money is provided by the lender, and has to be paid back with interest. (%)
Fixed Terms
Quick way of receiving the amount you need.
Repayable long or short term ( 3–5 years)
Banks will perform a risk assessment, and may require security.
A change in interest rates may make payments unaffordable.
If regular payments are not made, the business will be forced to close.

20. Over Drafts Are agreed with the bank
Less expensive and more flexible than a loan.
SHORT TERM
Charges occur according to the amount ‘overdrawn’
Lenders can remove overdraft facility at anytime.

21. Trade Credit Use the maximum length of time offered.
This will not apply if you are a new or un-established untrustworthy business.
The money needs to be repaid in such a small period of time (30 – 90days)

22. Factoring
‘A service offered by a financial organisation to recover outstanding invoices’
Removed burden of credit control
Improves cash flow immediately
Selling below face value. Receiving 80% or 90% of the recovered debt.
Could damage relationships with customers

23. Debentures Written acknowledgement of debt A type of fixed period loan
Unsecured (without collateral)
Secured only by the issuer

24. Example 1….
A debenture reserves your seat at the Twickenham Stadium Stadium for 10 years. (£6,000 each)

25. Venture Capital Capital mainly provided by banks or wealthy investors
Expect a return in interest and part ownership of the business
Considered a high risk investment
Popular with new companies (or ventures)

26. Business Angels
Angels typically invest their own funds, unlike venture capitalists.
Expect a wealthy return and part ownership of the business
Considered a high risk investment
Popular with new companies (or ventures)

27. Share Issue
Common for both start-up capital and additional capital at later stages of a business.
Firms raise capital by quite simply selling a share of the business
Issuing shares can be quite expensive, so only appropriate for raising large sums of capital.
PLC’s sell share on open stock market (i.e London stock exchange)
Ltd’s are restricted in the way they sell their shares.

28. Government Grants /Loans
Only a business is designated areas of the UK will benefit from government grants.
There are many different initiatives... Such as paying % of staff hiring costs, being a loan guarantor, providing money (grant) for business start-up costs.
Areas of poor growth
High Unemployment rates

29. Factors affecting the choice
The amount required
The cost of the money
Advice available
Choosing a funding method
Loss of control
The length of time for which the money is needed
The risk involved

30. Short Term Vs Long Term Loans Hire purchase Repayable within 1 year
Trade Credit
Bank Overdrafts
Debt Factoring
Selling Assets
Owners Capital
Retained Profit
Reducing Stock Levels
Loans
Hire purchase
Leasing
Share Issues
Mortgages
Debentures
Business Angels
Venture Capital
Family and Friends (?)
Repayable within 1 year
Repayable between 1 – 5 years

31. Questions
1. Outline the disadvantages of using internal sources of finance to fund major investment programs.
2. Why might a business try to avoid borrowing large sums of money over long periods of time.
3. What Criteria might a small business have to meet to attract financial support from the government?