STARTER Does anyone know: – Why an overdraft would not be used to fund a long-term project? – Why the government may offer a grant to a large organisation over a small new business? – Why a firm might prefer to use retained profit to expand rather than a loan?

1.4 The role of credit in the economy Role of banks in the economy Risk and liability Types and sources of credit (finance) and the impact of credit within the economy

a) Types of credit: o loans o overdrafts o trade credit b) Sources of credit: o banks o other firms c) Other types of finance: o venture capital o share capital o leasing d) Other sources of finance: o owner’s capital: personal savings o retained profit o sale of assets o individual investors o online collaborative funding e) Challenges in obtaining credit: o role and impact of credit on the economy

The rise of ‘Dragons’ Venture capitalists becoming more and more common Usually want part control in running the business tjk tjk

Finance methodExplanationBenefitsDrawbacks Owner’s Funds The existing owners of the business may invest more Retained Profits Profit that is made by the business but kept back Selling Assets Selling off items e.g. machinery that are not needed anymore Overdraft The bank allows the firm to overdraw to an agreed level. They can withdraw more than they have in their bank account – go below 0. Trade Credit When a business sells something it allows other businesses to take the item away but not actually pay for it. The goods will have to be paid for within an agreed amount of time (often 30 days) Debt Factoring A third party take on ALL the debts of one company – taking ownership of their debt. The company in debt ONLY have to pay the third party back. Leasing A method of obtaining items for a set period of time and at the end of the lease the item is given back. Only suited to items with a short life (technology developments) or if items is very expensive.

Finance method ExplanationBenefitsDrawbacks Debentures A long term loan secured against some form of collateral. Bank Loan A sum of money given to a business for 5-10 years (sometimes less) awarded by a bank. Has to be paid back in monthly instalments. Issuing Shares (share capital) This is money put into the business by the owner or owners. For new businesses it is the most likely form of finance. Get a share in the business Mortgage A very long term method of borrowing money which requires some kind of security Government Grants The government is eager to help people to start up in business because it creates jobs and provides more choice for customers. As such, government will often provide financial assistance to business start ups. Hire Purchase Obtaining items in return for a monthly payment over a period of time. The item will be owned when the business has paid the item off and the final payment has been made. Company cars, computers, lorries are examples of items obtained through hire purchase. Venture Capital The government is eager to help people to start up in business because it creates jobs and provides more choice for customers. As such, government will often provide financial assistance to business start ups. Online Collaborative funding A group of individual online banking/lending institutions that provide finance to a company and work with them to improve their business venture.

Sources of finance Innocent Smoothies Applying to a real life case

Innocent Smoothies ATQ ATQ Name all the sources of finance that are mentioned in this

Homework Evaluate whether a small chain (5 stores) of cupcake shops should fund their expansion through internal sources finance? (12 marks)