A level Business Revision – Sources of Finance #Finance

in this CashNews.co we’re going to have a look at sources of Finance we’re going to have a look at six different options businesses might use either to help them out with

Liquidity problems or to raise larger sums of money for Capital expenditure projects so we’re going to have a look at the differences between each and we’re going to try and ascertain what the advantages and limitations are of each one and we’ll

start with the factoring great source of Finance this Debt factoring is where if you are owed money by one of your customers one of your trade receivables we should call them

but you can’t afford to wait so your business is perhaps suffering some kind of short-term cash crisis some kind of Liquidity problems and you’ve got a big uh order from a customer that’s still waiting to be paid but you can’t afford to wait for that

customer to pay up anymore you can sell that Debt onto an organization known as a Debt factoring company so imagine you’ve got a a trade receivable for £100,000 and it’s coming to you in three months so you know that in three months time one of your

major customers is going to pay up £100,000 but you need cash now you need cash this month in order to meet your own Financial commitments maybe pay your own suppliers your Workforce marketing whatever you might need the cash for you can sell that 00,000 Debt that you’re

waiting to rece receive to another organization to another business now they won’t buy it from you for its full value cuz they’re going to make a Profit that’s how Debt factoring organizations function they make Profits by buying

Debts from business for less than their full value so they might pay you £80,000 for this Debt that you are owed now they can afford to wait for that Debt to mature they can afford to wait the full 3 months so they will buy it off you for £80,000

but then get paid the full 00,000 but for your organization it means that you get cash now today when you need it so you won’t realize the full 00,000 that you are owed but it brings the cash into your organization that you need now to solve your own Liquidity crisis so

obviously the advantage of this is that it allows businesses to release cash when they need it in order to solve their own Liquidity the downside is that you are missing out on the full value of the sales that you have made by selling that Debt onto a

Debt factoring organization still a very useful source of Finance St a shortterm source of #1a73e8; text-decoration: none;">Finance that often bails businesses out is what’s known as an Overdraft now an Overdraft is a facility that businesses can arrange with their Banks so they have it on their bank accounts and essentially what an

Overdraft allows a firm to do is to spend even when they have run out of money so an Overdraft is almost like like an extension onto your bank account so that as your bank account almost reaches zero and you don’t have any funds left in there anymore if

you’ve arranged what’s called an Overdraft facility the bank will allow you to spend beyond the money that you’ve got in your bank account up to an agreed limit so small businesses might have Overdrafts for say £5,000 £10,000 larger

organizations might have Overdrafts agreed for hundreds of thousands large plc’s perhaps even millions of pounds so that as they start to run almost down to zero in their own bank accounts they can carry on spending up to the Limit that they’ve agreed with their bank

now obviously the advantage of this is that it allows businesses to continue purchasing the Assets that they need for their organization even when they don’t have any cash of their own they can start almost spending the bank’s money the downside is is that you have to

pay to have an Overdraft facility so every month month that you use your Overdraft you go beyond your bank account limit of zero and into the bank’s Overdraft facility you get charged a fee and the interest on these fees is much larger than

you would pay even if you were borrowing from the bank in the form of a bank Loan so Overdrafts can be fairly expensive ways of borrowing money but they are a great almost like safety net for organizations so that they can carry on meeting their financial

commitments even when their own bank balance has gone down to zero a wonderful source of Finance that businesses might use is retained Profit so at the end

of the financial year when a business has calculated how much Profit it has made for the period there’s two things that they can do with it they can distribute it to their shareholders in which case it leaves the organization or they can choose to a portion a percentage of

their Profits to retain in the business for spending on growth and expand ion and development now the major advantage of retaining some of your Profits in the organization and using them on your business to grow is that you don’t have to pay any interest on

that money it’s an internal source of Finance it’s raised by the organization itself so it doesn’t require paying back in any way but the downside is is that that is money

that you are then taking away from your shareholders technically your shareholders might be looking at those Profits that the organization has made and thinking that they are entitled to all of that that all of that is going to get rewarded amongst the different owners but by

retaining some of those Profits you’re taking that money back out of shareholders hands now shortterm shareholders that are looking for quick returns from the organization might see too much retained Profits as a signal to sell their Shares

in the business and go and invest elsewhere however your longer term shareholders will probably look favorably on the use of retained Profits if it’s it’s a signal that the business is using it to grow and expand and the Dividends in years to come might

be even larger now a major source of Finance for organizations when they’re looking to raise quite large sums of Capital when they’re looking to raise money for

growth and expansion and the development of the organization is to use what is called share Capital so that is bringing new owners into the organization in return for giving them a stake or percentage a share of the business’s ownership now one of the advantages of this

method of Finance is obviously it can bring in quite large sums of money in return for a stake in the organization people may be prepared to pay quite large sums in addition those

shareholders that join the organization in LTDs at least might bring with them some industry knowledge some expertise some experience of of being involved in businesses I might even bring contact ta that they have in the industry that can Aid the business the limitation of it is is that bringing in

that Finance and bring in that expertise means relinquishing some of the control of the organization some shareholders may not want to be involved in the direction of the

organization and are happy just to pick up a dividend but other shareholders may expect to have some say so they can almost direct the organization now that they’ve got a stake in it and now that they’ve got funds that are tied up or at risk in this organiz ation so it can lead to the

original shareholders in the organization having to relinquish some of the power and the control that they have to involve and look after the needs of these new shareholders a very popular source of none;">Finance is to seek Loans from financial institutions like Banks and building societies if it’s for property this could be in the form of a mortgage which is a Loan just to secure uh office space factories warehouses whatever kind of sites the

businesses needs or it could just be a bank Loan to invest in uh it or Vehicles Machinery whatever Assets the business is looking to procure now bank Loans are advantageous because you can raise significant sums of money from bank

Loans and it’s a formal agreement with the organization with structured repayments that the business can plan for that the business can include as part of its Cash Flow forecasts so the business can really uh plan years into the future how much they’re

going to have to repay on this bank Loan and can monitor it and manage it the limitation of bank Loans is obviously that they have to be repaid back with interest on top so if you borrow £100,000 in order to invest into your business in the form of a bank

Loan you will end up paying that 00,000 back plus an agreed rate of interest on top so it can be an expensive way of raising Finance for your organization however you

contrast it to something like share Capital and a bank Loan means that you don’t have to relinquish any of the control of your organization so paying interest may be something that’s preferable to you rather than involving new owners in the organization

and you contrast it with something like retained Profit and a bank Loan means that all of your Profits then can be distributed to the shareholders to keep them sweet so again it might be a preferable source of

style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance final source of Finance we can bring to your attention is Venture Capital now this has

crossovers with both bank Loans and share Capital here because Venture Capital can come in two forms Venture Capital means involving other entrepreneurs wealthy individuals sometimes we call them business angels and inviting them

to invest in your organization now that can come in two forms first of all business angels might want to invest in that business in return for a share of the ownership of that organization so it works just like selling share Capital in the business and business angels will Absol

absolutely rather than be silent Partners want to be involved in our organization bring us their knowledge bring us their expertise bring us their industry contacts so one of the advantages of using Venture Capital to raise bold; color: #1a73e8; text-decoration: none;">Finance is if they take a stake in the organization they will bring a lot of expertise that your business can utilize there are instances where we might use Venture Capital so money from Rich wealthy successful entrepreneurs that

doesn’t actually involve selling a stake of the organization rather than taking Loans from Banks we might find wealthy individuals or Venture Capital organizations that are prepared to invest in our business now sometimes Venture Capital

Loans are are are used by businesses when they might have been rejected by Banks they might have been turned down for bank Loans especially if they’re new organizations but they might be able to find Venture Capitalists that maybe are

prepared to take a higher risk in inves inting in a new business that a bank is prepared to take and lend the organization money and again that Loan from The Venture Capitals will come with expertise and advice and support and Industry contacts however borrowing

from Venture Capitalists often involves repayments at a higher rate of interest to compensate for the fact that you’re perhaps a more of a risky organization to loow money to so venture Capital is great in that you are borrowing money when you been turned

down from a bank or it’s great that they might be buying a stake in your organization and they can bring you expertise and advice and support and knowledge but you’re either going to have to pay them a dividend and involve them in the ownership of the organization or if it’s just

a venture Capital Loan the rates of repayment may be higher than bank Loans might be so there’s our six sources of Finance very common

that we might get asked questions about these sources of Finance in our business a level exams hopefully that gives you the lowdown on each we wish you luck with your ongoing revision see you

soon for another tutorial