1. Level 1 Business Studies
1.1 - AS90837
Demonstrate an understanding of internal factors of a small business

2. Sources of Funding Options
Students will identify the various types of finance available to establish a business:
Identify the reasons a small business needs finance
Identify the types of funding available – short term and long term, internal and external
Explain the advantages and disadvantages of different types of funding

3. Reasons a small business needs funding
Creating and starting a business
Expanding an existing business
To assist businesses during difficult periods

4. Internal Funding
Contribution by existing owners into the business, eg retained profit (keeping back profit).

5. External Funding
Funds provided by a bank or other finance company, eg a loan, mortgage or overdraft.

6. Short Term Finance
Provides working finance for the day to day running of a business.
Finance needed for up to three years

7. Medium Term Finance
Often needed to purchase capital goods, e.g. farm tractor or printing equipment.
Finance needed for three to five years

8. Long Term Finance
Usually used to purchase long term fixed assets, e.g. additional buildings or plant.
Finance needed for more than ten years

9. Internal Funding Options
1. Retained Profit: owners take their share of the profit and then the rest is ploughed back into the business
Does not have to paid back to other finance
No interest has to be paid like a loan
Reduced dividend made to share owners
Some businesses profits are too low to fund expansion
A new business will not have retained profit

10. Internal Funding Options
2. Sale of existing assets: any assets not required by the business could be sold, e.g. surplus land
A good use of the business capital
Sometimes takes time to sell an asset
This option is not available to new businesses

11. Internal Funding Options
3. Running down stock levels to raise cash
A relatively quick way to raise cash
Reduces cost of storing stock
Businesses need to be careful to ensure stock levels meet demand

12. Internal Funding Options
4. Owner’s Savings: an option for sole traders and partnerships
Quickly available
No interest payments
Increases risk for owner due to unlimited liability
Owner may not have the required savings

13. External Funding Options
1. Issues of shares: only available to limited liability companies
Would not need to be repaid to shareholders so is therefore permanent
No interest payments
Shareholders expect to be paid a dividend (% of the profits each year,
Depends on how many shares they own)

14. External Funding Options
2. Bank Loans
Size of loan and length of repayment can vary
Usually quick to organise
Larger companies usually able to borrow larger amounts of money
Interest must be paid
Loan needs to be repaid
Security or collateral usually required (eg: they use your building as security)

15. External Funding Options
2. Grants or subsidies from outside agencies: e.g. the government
Usually do not have to repaid
Usually some ‘string attached’ – such as time to complete a certain job.

16. Short Term Finance 1. Overdraft
Businesses are given permission to ‘overdraw’ their bank account
This finance can be used for everyday expenses, such as, wages
Overdrafts can vary each month
Overdrafts can be cheaper than a loan
Interest rates vary
Banks can call in the overdraft at any time

17. Short Term Finance
2. Trade Credit: when businesses delay paying their suppliers
A little like an interest free loan
Suppliers may withdraw any discounts or refuse to work with the business in the future

18. Medium Term Finance 1. Bank Loans: payable over a fixed period
Usually require monthly payments
Interest charged – can be high
A large loan is not required to purchase an asset (buildings, machinery – anything the business owns of value)
Cash deposit is paid at beginning of loan period

19. Medium Term Finance 2. Hire Purchase: payable over a fixed period
Allows a business to buy a fixed asset and pay it off over a long period
Business does not need to find large amounts of cash at purchase of asset
Interest needs to be paid – rate can be high

20. Medium Term Finance
3. Leasing: allows a business to use an asset without paying for it.
Enables business to use asset they can not afford to purchase
Monthly payments for lease required
Leasing company responsible for maintenance
Cost of leasing higher than purchasing asset

21. Long Term Finance
1. Issue of Shares: used to purchase fixed assets, update or expand a business.
Only available to limited liability companies
Private limited liability businesses sell shares privately to friends, family or business associates
Share issue provides permanent capital
No interest payments
Dividends paid to share owners
(dividend is a % of the profits)

22. Long Term Finance
2. Long Term Loans: From the bank to fund expansion over a long period of time (over 10 years)
32) Factors
Interest paid
Must be repaid
Often need security

23. Choice of Finance
Factors to consider before deciding on type of finance:.
What is being purchased?
Match the sources of finance to the reasons it’s required. - Buying stock to cover busy time – short term - Buying fixed assets eg: building – long term

24. What do banks need to know before providing finance?
The most important information banks need to find out about is the risk they will be taking by lending a business money

25. Information banks may require
Financial records illustrating a businesses trading record
Projected forecasts, i.e. sales, profit and how the business intends paying the interest and the principal back to the bank
The experience of the business people. How likely are they to succeed in their business venture? Credit rating?

26. Information banks may require
4. A Business Plan: most bank will require a business plan, particularly if it’s a new business. Banks will want to know:
What product is being produced
Potential customers
Costs and sales required to cover costs
Fixed assets required, such as, machinery
Number of employees
Location of business