Unit 18

The big picture When starting a business you will need to raise some money to be able to get the business started. There are two ways of raising the money Long Term Finance, and Short term finance Through this unit you will learn the difference and why there are two ways of financing a business.

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Objectives Explain the main sources of Finance for a small business start up, Understand long term sources of finance, such as loans, personal savings, profit, venture capital and share capital in the context of a private limited company, Understand short term sources of finance such as overdrafts and trade credit

Key Terms Long Term finance – sources of finance that are borrowed or invested, typically for longer than a year. Short Term Finance – sources of money for business that may have to be repaid either immediately or fairly quickly, such as an overdraft, usually within a year. Share – a part ownership in a business. Shareholders – the owners of a company, Share Capital – the money value of a company which belongs to the shareholders. Dividends – share of the profits paid to the shareholders, Personal Savings – money that has been set aside or not spent by a person or household,

Key Terms cont.. Venture Capitalist – an individual or company that buys shares with the hope of making a profit Loan – money borrowed which has to be paid back. Security (or collateral) – an asset used to guarantee a repayment of a loan, Mortgage – a loan on which property is used as security Retained Profits – profit reinvested to the business to help it grow, Leasing – renting equipment instead of buying it Overdraft – borrowing money from a bank on a current account Factoring – a way round the 30 day trade credit.

Getting Started When you start up a business you (may) have to raise money to get started and run the business from the off. You will have to pay:- Wages – for you and/or staff, Utility bills such as electricity, gas and water, The rent on the business premises, Any other costs such as stock, or things for the business You have two choices, LONG TERM or SHORT TERM finance.

Long Term Sources of Finance. Research the different types of Long Term Finance:- Share Capital, Venture Capital, Retained profits, Leasing, Grants Research the different types of Short Term Finance:- Bankoverdraft Trade Credit Factoring Find out what each one is and put together a ‘Guide to Finances both Long Term Finance’ and Short Term Finance.

Long-term sources of finance : Share Capital – this comes from investors who buy shares in the business. This means that they have a part share in the business and would be entitled to the same share of the profit eg 25% shareholding = 25% of the profit. Sometimes VENTURE capitalists are used, they risk or venture their money in the hope that they will make a profit with the business

Long-term sources of finance Loans – another source of long term finance is a loan. Bank loans to businesses tend to be for a period of time, up to 5 years. Banks like to have security (or collateral) for a loan. This is something that the business can sell if they can not repay the loan. Most business owners used their house.

Long-term sources of finance Retained Profits – Once a business is up and running it will hopefully make a profit which belongs to the owners of the business. They could choose to take a profit as dividends this is a payment out of the company this would be their reward for investing in the business if they put the money back into the business then become retained profits

Long-term sources of finance Leasing - some businesses use equipment or vehicles that are rented from another business. this is an alternative to buying the equipment and borrowing money. Such rental agreements by a business are called leasing Grants - some small businesses are eligible for grants. Very small start- ups might get a grant from charities like Princess trust. Grants are also available from the government. A business may get them to starting up in deprived areas some may be for working with the local community. Also see - ffinancerev2.shtml ffinancerev2.shtml

Short Term Sources of Finance. Using a bank account overdraft is a form of short- term finance. Money from customers is put in to the bank account and the overdraft limit on the account can be used to help keep the business running. Overdraft limits are usually set to about £2000. The advantage is that the business can use that money without actually having it. Trade credit is where you can buy things from your suppliers without actually paying for the goods. The traders usually give you 30 days credit in which to pay the for the goods, this is called trade credit.

Short Term Sources of Finance. Factoring is when a business supplies goods or services to another businesses, and it has to give trade credit. This means that It has to wait at least 30 days for the invoices to be paid. A factor is a financial service, typically a bank, which will pay the business, typically 90% of the value of the invoice immediately so it does not have to wait. The bank does, however, make a charge for this service.

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