Business Management - Intermediate 2Business Enterprise © Copyright free to Business Education Network members 2007/2008B104/078 – Bus Enterprise – Business in Contemporary Society 1

Business Management - Intermediate 2Business Enterprise © Copyright free to Business Education Network members 2007/2008B104/078 – Bus Enterprise – Business in Contemporary Society 2

Business Management - Intermediate 2Business Enterprise © Copyright free to Business Education Network members 2007/2008B104/078 – Bus Enterprise – Business in Contemporary Society 3

Business Management - Intermediate 2Business Enterprise © Copyright free to Business Education Network members 2007/2008B104/078 – Bus Enterprise – Business in Contemporary Society 4 BUSINESS ENTERPRISE Business in Contemporary Society Methods of Obtaining Finance

Business Management - Intermediate 2Business Enterprise – Business in Contemporary Society © Copyright free to Business Education Network members 2007/ Methods of Obtaining Finance B104/078 – Bus Enterprise – Business in Contemporary Society Business in Contemporary Society

Business Management - Intermediate 2Business Enterprise – Business in Contemporary Society © Copyright free to Business Education Network members 2007/ Methods of Obtaining Finance All businesses need finance in order to operate. There are many different ways that finance can be obtained. SOURCES OF FINANCE FALL INTO 2 CATEGORIES: 1Short-term sources of finance: ie typically repaid within a year. Bank Overdraft Trade Credit Factoring Sale of an Asset Government Grant Retained Profits B104/078 – BiCS – Method of Obtaining Finance

Business Management - Intermediate 2Business Enterprise – Business in Contemporary Society © Copyright free to Business Education Network members 2007/ Long-term sources of finance: ie typically repaid over more than one year. Bank Loan Leasing Hire Purchase Owner’s Savings Share issue Debentures Venture Capital Mortgage Sources of Finance - continued B104/078 – BiCS – Method of Obtaining Finance 6. Methods of Obtaining Finance - continued

Business Management - Intermediate 2Business Enterprise – Business in Contemporary Society © Copyright free to Business Education Network members 2007/ Short-term sources of finance Bank Overdraft Trade Credit Agreement between the bank and the customer to withdraw more funds from a bank account than there is available. Interest is only charged on the amount overdrawn. Interest charges tend to be higher than on a bank loan. Extending credit terms with your creditors means that you will be able to keep cash for longer. Reducing credit terms with your debtors means that you can receive funds sooner. B104/078 – BiCS – Method of Obtaining Finance 6. Methods of Obtaining Finance - continued

Business Management - Intermediate 2Business Enterprise – Business in Contemporary Society © Copyright free to Business Education Network members 2007/ Factoring Sale of an Asset This involves selling a business debt to a factoring company for a lesser value. The business receives immediate cash and the factoring business will receive the full amount from the debt in due course. Factors are normally only interested in large quantities. This involves selling a business asset for immediate cash. The value of the business will decrease but the cashflow will improve. Can often be a desperate measure unless the asset is redundant. B104/078 – BiCS – Method of Obtaining Finance 6. Methods of Obtaining Finance - continued

Business Management - Intermediate 2Business Enterprise – Business in Contemporary Society © Copyright free to Business Education Network members 2007/ Retained Profits Government Grant The government can offer various means of assistance for businesses setting up (in areas of high unemployment or to encourage enterprise). The business may receive a cash amount or get a reduction in tax rate for a period of time. Business may set aside profits each financial year which can be used to reinvest in the business. This means that there is less available for shareholders. This method does not involve borrowing, therefore no interest. B104/078 – BiCS – Method of Obtaining Finance 6. Methods of Obtaining Finance - continued

Business Management - Intermediate 2Business Enterprise – Business in Contemporary Society © Copyright free to Business Education Network members 2007/ Long-term sources of finance Bank Loan Leasing An amount of cash can be borrowed from the bank and this will be repaid over an agreed period of time at an agreed rate of interest. This is very flexible, there are many competing offers by lenders. A business can pay rental on an asset which prevents having to finance the asset value when it is bought. The business will never own the asset. B104/078 – BiCS – Method of Obtaining Finance 6. Methods of Obtaining Finance - continued

Business Management - Intermediate 2Business Enterprise – Business in Contemporary Society © Copyright free to Business Education Network members 2007/ Hire Purchase Owner’s Savings A business will own the asset that it buys through an agreement to pay for it over a set period of time. There will normally be interest attached although many firms in a competitive environment offer interest free credit terms. Personal finance through whatever means can be used to invest into the business. This reduces the personal wealth of the owner. This prevents having to borrow and therefore pay interest. B104/078 – BiCS – Method of Obtaining Finance 6. Methods of Obtaining Finance - continued

Business Management - Intermediate 2Business Enterprise – Business in Contemporary Society © Copyright free to Business Education Network members 2007/ Share issue Debentures Limited Companies may decide to issue more shares and the shareholder investment can provide additional funding. The business will lose more control of the business. There will be a greater burden on the business to pay dividends. Only applies to a Plc. Large sums can be loaned to a business. The Plc pays interest only for the period of the loan. The full amount borrowed will be repaid on a redemption date. B104/078 – BiCS – Method of Obtaining Finance 6. Methods of Obtaining Finance - continued

Business Management - Intermediate 2Business Enterprise – Business in Contemporary Society © Copyright free to Business Education Network members 2007/ Venture Capital Some lenders will loan funding to high risk businesses when banks decide a loan is too risky. The cost to the business of this is that they will have to pay higher interest on the loan. Often venture capitalists will ask for a part share in the business. Mortgage This form of lending is specifically for financing property. Large amounts can be borrowed on varied terms according to the lender. Borrowers can shop around for the best deals and change lenders at any point throughout the term of borrowing. B104/078 – BiCS – Method of Obtaining Finance 6. Methods of Obtaining Finance - continued

Business Management - Intermediate 2Business Enterprise – Business in Contemporary Society © Copyright free to Business Education Network members 2007/ Organisations offering financial assistance LEC’s – Local Enterprise Companies These are government funded organisations that offer: free advice/grant aid training courses Others include: Business start-up scheme EU – regional development fund/social fund The Prince’s trust Loan Guarantee Scheme Trade Associations B104/078 – BiCS – Method of Obtaining Finance 6. Methods of Obtaining Finance - continued