3. 26 Sources of business finance

3.26 Sources of business finance Why businesses need money  They are just starting and need to buy premises and equipment.  They have an opportunity to introduce a new product or service.  A major item of equipment or building needs to be brought up to date. Businesses need extra money at times because:

3.26 Sources of business finance The sources of funds 1  Owner’s funds – savings of the owner – or an additional mortgage taken out on their house.  Profits – profits which have been retained and not paid out as dividends.  Loans – from a bank or other financial institution.  Government grants – available for specific reasons, eg expanding in a deprived area.

3.26 Sources of business finance The sources of funds 2  Hiring and leasing – this saves having to buy expensive items outright as payments are made in regular instalments.  Issuing shares – only applies to public limited companies whose shares are bought and sold on the Stock Exchange.  Selling assets – such as unwanted buildings or spare land.  Venture capital – finance from a company which specialises in lending to successful small businesses – often in exchange for shares.

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

3.26 Sources of business finance Making the choice 1 – internal sources SourceAdvantagesDisadvantages Owner’s funds Owner keeps control Could lose everything if business fails Retained profit Owner(s) make decision Reduces reserves and possibly future dividend payments. May be insufficient for needs.

3.26 Sources of business finance Making the choice 2 – bank options SourceAdvantagesDisadvantages Bank loanAdvice available. Repaid over an agreed period Bank may refuse. Repayments may rise if interest rates increase. OverdraftCheaper than loan for short-term finance Bank may refuse. Only very short-term.

3.26 Sources of business finance Making the choice 3 – other external sources SourceAdvantageDisadvantage Government grant May not need to be repaid though spending closely checked Complicated and restricted to certain areas/reasons Hiring and leasing Saves paying ‘up- front’ for an asset. Asset may belong to business eventually. Only useful for obtaining assets. Costs more than outright purchase.

3.26 Sources of business finance Making the choice 4 – other external sources SourceAdvantageDisadvantage Issuing shares Large amounts available, never repaid Only for plcs Shareholders paid dividends Selling assets Converts unused items into capital Only appropriate if have unused assets! Venture capital Large amount may be available + advice Owner may lose some control over business

3.26 Sources of business finance Funding in the real world The airline ‘Go’ was sold by British Airways in 2001 for £110 million. 43% of the shares were held by 3i – a venture capital company. In 2002, Easyjet bought Go for £374 million – and financed the purchase by offering new shares to existing shareholders. Q. How much money did 3i make on the deal?

3.26 Sources of business finance Which would you choose? If you had to find the finance for:  A fleet of new cars for sales staff?  Short-term finance to pay a large bill one month?  Long-term finance for a small, thriving IT firm?  A company setting up in a deprived area?  A plc which wants to expand abroad?

3.26 Sources of business finance Were you right? Answers  Fleet of cars =  Short-term to pay a bill =  Long-term for IT firm =  Company in deprived area =  Plc expanding abroad = hiring/leasing bank overdraft venture capital government grant selling shares