Presentation on theme: "Level 1 Business Studies"— Presentation transcript:
1 Level 1 Business Studies 1.1 - AS90837Demonstrate 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 financeIdentify the types of funding available – short term and long term, internal and externalExplain the advantages and disadvantages of different types of funding
3 Reasons a small business needs funding Creating and starting a businessExpanding an existing businessTo assist businesses during difficult periods
4 Internal FundingContribution by existing owners into the business, eg retained profit.
5 External FundingFunds provided by a bank or other finance company, eg a loan, mortgage or overdraft.
6 Short Term FinanceProvides working finance for the day to day running of a business.Finance needed for up to three years
7 Medium Term FinanceOften needed to purchase capital goods, e.g. farm tractor or printing equipment.Finance needed for three to five years
8 Long Term FinanceUsually 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 businessDoes not have to paid back to other financeReduced dividend made to share ownersSome businesses profits are too low to fund expansionA 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 landA good use of the business capitalSometimes takes time to sell an assetThis option is not available to new businesses
11 Internal Funding Options 3. Running down stock levels to raise cashA relatively quick way to raise cashReduces cost of storing stockBusinesses need to be careful to ensure stock levels meet demand
12 Internal Funding Options 4. Owner’s Savings: an option for sole traders and partnershipsQuickly availableNo interest paymentsIncreases risk for owner due to unlimited liabilityOwner may not have the required savings
13 External Funding Options 1. Issues of shares: only available to limited liability companiesWould not need to be repaid to shareholders so is therefore permanentNo interest paymentsShareholders expect to be paid a dividend
14 External Funding Options 2. Bank LoansSize of loan and length of repayment can varyUsually quick to organiseLarger companies usually able to borrow larger amounts of moneyInterest must be paidLoan needs to be repaidSecurity or collateral usually required
15 External Funding Options 2. Grants or subsidies from outside agencies: e.g. the governmentUsually do not have to repaidUsually 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 accountThis finance can be used for everyday expenses, such as, wagesOverdrafts can vary each monthOverdrafts can be cheaper than a loanInterest rates varyBanks can call in the overdraft at any time
17 Short Term Finance2. Trade Credit: when businesses delay paying their suppliersA little like an interest free loanSuppliers 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 paymentsInterest charged – can be highA large is not required to purchase an assetCash deposit 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 periodBusiness does not need to find large amounts of cash at purchase of assetInterest needs to be paid – rate can be high
20 Medium Term Finance3. Leasing: allows a business to use an asset without paying for it.Enables business to use asset they can not afford to purchaseMonthly payments for lease requiredLeasing company responsible for maintenanceCost of leasing higher than purchasing asset
21 Long Term Finance1. Issue of Shares: used to purchase fixed assets, update or expand a business.Only available to limited liability companiesPrivate limited liability businesses sell shares privately to friends, family or business associatesShare issue provides permanent capitalNo interest paymentsDividends paid to share owners
22 Long Term Finance 2. Long Term Loans:. Interest paid Must be repaid Often need to be secured against a asset.
23 Choice of FinanceFactors to consider before deciding on type of finance:.What is being purchased?Match the sources of finance to the reasons it’s required. Stock, cover busy time etc – short term Fixed assets – 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 recordProjected forecasts, i.e. sales, profit and how the business intends paying the interest and the principal back to the bankThe 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 producedPotential customersCosts and sales required to cover costsFixed assets required, such as, machineryNumber of employeesLocation of business