Sources of finance Hodder & Stoughton © 2016

Sources of finance All types of businesses need money to start up, stay in business or to expand. Here is an overview of the types of finance available to businesses. Hodder & Stoughton © 2016

Sources of finance Internal i.e. from within the business itself External i.e. from outside the business 1. Owners’ savings 2. Retained profit 3. Reducing the levels of stock 4. Sale of existing assets 5. Shareholders Short term Overdraft Short-term loan Trade credit Debt factoring Medium term Bank loan Leasing Hire purchase Long term Long-term loans, e.g. mortgage Venture capitalist Grants Crowdfunding

Key term: trade credit Just like a credit card where you buy something now and don’t pay for it until later. Trade credit means that you will usually get between 30 and 45 days to pay your bill after receiving the goods. Hodder & Stoughton © 2016

Key term: overdraft This is a facility provided by a bank when the balance of your current account goes into negative figures. It is for an agreed amount and an agreed period of time and if this is exceeded then high costs will occur. Hodder & Stoughton © 2016

Key term: leasing This is when a business rents an item instead of paying for it all at once. This way the business saves money because it makes a monthly payment. Businesses often lease cars or machinery but they never get to own them. However, they do get free upgrades and maintenance so the business’ cash flow may be more predictable. Hodder & Stoughton © 2016

Key term: hire purchase This is when a business will pay for an item in regular instalments over a given period of time. Hodder & Stoughton © 2016

Key term: venture capitalist Venture capital is a type of private equity, a form of financing that is provided to small start-up businesses that are considered to demonstrate high growth potential. Venture capital funds invest in these early-stage companies in exchange for equity (an ownership stake) in the companies they invest in. Hodder & Stoughton © 2016

Key term: crowdfunding This is the practice of funding a project or venture by raising money from a large number of people, who each contribute a relatively small amount in return for a percentage of the equity in the business. For more on crowdfunding, see B USINESS R EVIEW, Vol. 23, No. 1, pp. 28–29. Hodder & Stoughton © 2016

What factors will influence the choice of finance? The length of time, e.g. short, medium or long term. Cost of borrowing, e.g. interest rates and fees. Terms and conditions of contract. Flexibility of finance. The amount of money required. The relationship with the lender. Hodder & Stoughton © 2016

Student task: cost of borrowing The cost of borrowing to businesses and households is often reflected in the interest rate that determines the monthly repayments. 1What is the impact on UK businesses if interest rates increase from 0.5% to 2%? 2What is the impact on UK businesses if interest rates decrease from 0.5% to 0.25%? Hodder & Stoughton © 2016