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Learning objectives Identify at least three reasons why a business may need finance. Understand the advantages and disadvantages of at least 4 sources.

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Presentation on theme: "Learning objectives Identify at least three reasons why a business may need finance. Understand the advantages and disadvantages of at least 4 sources."— Presentation transcript:

1 Learning objectives Identify at least three reasons why a business may need finance. Understand the advantages and disadvantages of at least 4 sources of finance. Explain which sources of finance you would use for your business 1 of 20 © Boardworks Ltd 2006

2 When does a business need finance?
What is finance? Money used to purchase things the business needs or want. What is a source of finance? It is a method of getting hold of the money you need. Most of the time you have to pay it back and it can be expensive. When might a business need finance? 1. When it is starting – up. 2. When it needs to buy equipment or premises. 3. When it wants to expand the business.

3 How many source of finance do you know?
Definition

4 Sources of finance Sources of finance are classed as being either internal or external. Internal sources: finance from within the business. External sources: finance from outside the business.

5 Internal Sources of Finance
Internal finance saves a business from borrowing from a lender and having to pay back interest. 1.Owners Funds/Capital The owner of the business uses their own personal savings and invests in the business Easy to access, no money to pay back, no interest to pay The person may lose all their savings if the business fails. Could you use this source of finance to start your business?

6 Internal Sources of Finance
Internal finance saves a business from borrowing from a lender and having to pay back interest. 2.Selling Assets The owner decides to sell items that they own and use the money to invest in the business. Money gained can be used to buy a new asset. No money to pay back, no interest to pay The “sold” asset is lost Could you use this source of finance to start your business?

7 Internal Sources of Finance
Internal finance saves a business from borrowing from a lender and having to pay back interest. 3.Using Profit (Retained Profit) The owner decides to use the profit they have made and invest this profit back into the firm. No money to pay back, no interest to pay Owner cannot then have this money for themselves Could you use this source of finance to start your business?

8 External Sources of Finance
External sources of finance come from outside a business and are more difficult to arrange than internal sources. 1.Bank Loan/ Mortgage Borrowing an amount of money from a bank and paying it back in instalments. Interest is added to the loan. Business can spread the cost of the repayments Interest is added to the amount borrowed External sources: finance from outside the business.

9 External Sources of Finance
External sources of finance come from outside a business and are more difficult to arrange than internal sources. 2. Overdraft Taking more money out of your bank account than you have in it. The overdraft is flexible – you can go overdrawn up to a maximum (eg £10,000) Interest is charged for every day you are overdrawn External sources: finance from outside the business.

10 External Sources of Finance
External sources of finance come from outside a business and are more difficult to arrange than internal sources. 3.Hiring and Leasing Rather than buying an asset, a firm decides to lease or “rent” the item. The leasing charge is cheaper than buying the asset. Faults will be mended by the firm leasing the asset The asset does not belong to the firm and therefore cannot be sold External sources: finance from outside the business.

11 External Sources of Finance
External sources of finance come from outside a business and are more difficult to arrange than internal sources. 4.Selling Shares Persuading members of the public to invest in the company by buying shares. (You need to be a PLC or LTD to do this) No money to pay back, no interest to pay Ownership of the company is “shared” between more people – danger of a possible takeover External sources: finance from outside the business.

12 External Sources of Finance
External sources of finance come from outside a business and are more difficult to arrange than internal sources. 5.Government or EU (European Union) Grant Applying to the government for an amount of money to be used for a specific purpose. It is usually a loan. Interest on the loan is cheaper than a bank Often only available in certain parts of the country where unemployment is high External sources: finance from outside the business.

13 Which source of finance?
To replace obsolete computer equipment (cost £50,000) WDP Ltd want to pay wages at the end of the week but they have no money in their bank account. To open new offices in an area of unemployment such as the NE of England. To purchase a fleet of company cars for the sales reps. Five sources of finance that does not require the paying back of any interest.

14 In pencil fill in the first section of the sheet
Which sources of finance do you think you will/will not use in your business? In pencil fill in the first section of the sheet

15 In pencil fill in the rest of the sheet
Match the advantages and disadvantages to the sources of finance you have picked In pencil fill in the rest of the sheet

16 ***Remember to fully explain each source of finance you use***
What is finance? Explain three reasons why a business might need finance? What is the difference between internal and external finance? Explain at least two sources of finance that would not be relevant to your business? Give the advantages and disadvantages of each source of finance Explain why you could not use them for your business (Not a PLC) Explain the sources of finance that you will use in your business? Explain the advantages and disadvantages of each source of finance What will you use each source of finance for (Mortgage = Premise) ***Remember to fully explain each source of finance you use***

17 Who wants to be an A* student?
Answers: Retained profits An overdraft Hire purchase Venture capital Security Assisted areas Must return it Dividends Share price Hostile takeover

18 Bitesize - Sources of Finance
Extension Activity Bitesize - Sources of Finance Read all the information about sources of finance and complete the test. Insert a copy of the test in your work


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