Sources of finance #Finance

this CashNews.co then is going to be about the different sources of Finance available to business because when a business is new and starting up this is probably

going to be one of the first thing it’s going to need to think about is where is their funding going to come from and to get set up and get underway and equally when businesses grow so even large um plc businesses are going to require sources of

style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance sources of funding in order to fund their growth and expansion as well so we’re going to look at internal and external sources of color: #1a73e8; text-decoration: none;">Finance here so internal sources of Finance are generated from within the business and there’s probably only three

main ways in which that’s going to happen so the first of these would be personal Savings or you might sometimes see that referred to as owner’s Capital so that’s basically as the owner of the business you put your own money into helping to set up

and continue running the business the big benefit of that is going to be that you retain all of the control over your own business so you’re not selling off Shares of the business to other people and for most startups is probably going to be the first option you know how much

Capital how much Savings do you have to to start trying to set up and run your business the downside to that clearly is that not everyone has enough money to start up their own business so that funding is likely to be limited and then you’re probably going to

need to look at other sources of Finance beyond that as well probably for more established businesses then you could look at your retained Profit or

sometimes called reserves so you might look at your previous year’s earnings and previous year’s Profit what’s left over that you could then reinvest into the business the good thing about that is you don’t have to pay interest on it and like with your

personal Savings as well you keep control of your business downside would be that shareholders would have put money into the business and they would be expecting a dividend a dividend a return for that investment they’ve put into the business and if you’re using all of

the money as retained Profit and reinvesting it into the business then they might be unhappy that the lack of Dividends being paid to them and finally you might look at sale of Assets which essentially would be selling fixed Assets

machinery equipment that might be used to produce output for your business you could sell some of those which is quite a good quick way to turn what we would call a fixed asset into something more liquid and a good kind of a shorter term form of cash the problem with that is that you then lose the

asset clearly you’re not then going to be able to use the asset to produce the output they would be producing so if you sell one of your delivery vans you can no longer use that delivery van and to carry out your deliveries and then produce Revenue and Profit

for your business so as internal sources of Finance can be quite limited now quite quickly you might find a business looking outwardly to external sources of

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance to add to their funding so the first of these might be family and friends so just looking for a simple Loan from from friends or family and i would suggest that

they might be more likely to lend you money than for example a bank you’ve got kind of a personal connection there and so you’re more likely to be to be able to persuade them to lend you money and without them asking for all sorts of assurances so that’s quite a good source for

startups and new businesses as well the problem with this is just like from personal Savings your friends and family are not necessarily going to have loads and loads of money to lend to you and also if you fail to pay them back particularly could start to affect your personal

relationships with them and so you might then look towards banks and borrowing from banks can come in a few different forms so you might look to take out a bank Loan which is borrowing a set amount of money over a period of time which you’re going to repay with interest the

good thing about getting a bank Loan lots and lots of businesses use Loans because you don’t dilute the control and the ownership of your company so later on we’re going to mention things to do with share Capital where you’re

maybe breaking up the ownership of your company and losing control of it bank Loan you don’t do that you just pay back the Loan with the interest that you owe and the downside to this is that the bank may require some form of collateral which is essentially

security against the Loan so it means that if you fail to pay back the Loan there is something for example a building or some equipment or some machinery which they could reclaim um in order to take back the value of the Loan that’s owed to

them and this is why when you take out a mortgage you’re able to borrow a lot more than if you were to take out a simple bank Loan because your property in the case of a mortgage is being used as that collateral another downside to Loans is that you need to

pay the interest back on that Loan so unlike for example with retained Profit where you’re using your own Profit from a previous year you don’t need to pay interest with a bank Loan you’re going to need to pay

interest over and above what you’ve borrowed another form of borrowing which could come from banks would be to use an Overdraft which would be an agreement to overspend the limit of your bank account up to a certain amount and this is quite a flexible form of borrowing so

it’s quite a good short-term one you only pay interest on what you’re borrowing so if you overspend your bank account just for a few days then you only pay interest on that amount for those days which you overspend the bank account whereas if you had borrowed a Loan for

that whole period then you’d have to pay back the Loan with the interest that you owe but in order to to pay for that the downside to that would be that Overdrafts are usually charged at higher rates of interest so you’d only really use them for

short-term borrowing you wouldn’t be likely to get an Overdraft for you know a five or ten year period and use it consistently over that period because the rates of interest that you’d have to pay back would be much higher banks can sometimes be concerned about the

level of risk involved with lending and so they might be reluctant to lend for that reason you might struggle to persuade a bank to give you a Loan and so it’s led to a rise particularly in recent years of something called peer-to-peer funding where particularly kind of

online platforms match up lender to borrower and as a result of that you kind of cut out the middleman so the bank’s going to exist there to make their own Profit whereas if you have a direct sort of link up between an individual business that wants to lend money in an

individual business that wants to borrow money it could potentially be better deals to be had for both parties there possible downside to this might be less kind of security and regulation around that kind of industry um so you might be taking on you know a bit more risk um than if you were dealing

with uh kind of more concrete institutions like banks you might also look to other businesses to borrow money and to raise Finance and this could come in a few different

forms so one of those would be leasing so leasing is when rather than purchasing a fixed asset outright you would essentially look to rent it so you’d rent or lease a large fixed asset like a van or a piece of equipment and that means that you don’t have to front up huge amounts of

money straight away in order to pay for it good thing about this is that it can help to manage your Cash Flow and Liquidity position because if you’re going out there and buying those large fixed Assets then that’s going to cost you

huge amounts of money up front which can cause Cash Flow problems but if you lease them then you’re going to spread those payments over a number of months and that’s going to help your Cash Flow position the downside to that is that the asset is never

actually then owned by you so if you lease it for a really long period of time you might actually end up paying more than if you just bought it out right in the first place a really really common one would be trade Credit so this is when businesses uh basically negotiate a period

of time where they would have their goods delivered to them and then they wouldn’t pay for them straight away so they would pay for them maybe in 30 days or 60 days time so a really really common arrangement between businesses and this as well can help to boost working

Capital it’s quite a short-term source of Finance and improve your Liquidity a possible downside is that all businesses really are in

that same position in terms of wanting to to improve their Cash Flow boost their working Capital so if you’re negotiating with your supplier and trying to delay the payment that you’re making to them well they’re going to be looking for prop

payment to make sure they can manage their working Capital as well so it’s unlikely you’re going to be able to negotiate too long a period before you’re going to need to pay them business angels are wealthy entrepreneurs who provide

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance for funding for a business in return for a stake in ownership of that business and this is sometimes called venture Capital investment as well so the big

advantage of that is that these business angels can bring their expertise in different Markets into the business and also they’re more willing to take risks usually than banks because

they’re looking for that big reward and so they’re more willing to take on board um a bigger level of risk than lots of other lenders would be happy with the downside to that is that in return for that the lender giving you um the money and taking on that risk they’re likely to

want you to give up a big share of the business they might require 20 30 40 of your business in return for giving you that venture Capital investment another possible external source would be crowdfunding and so crowdfunding happens when as a business you can persuade large numbers

of people to all contribute a small amount towards the the funding of your business this is quite innovative it’s a bit of a different method and there’s no need for collateral or rigid agreement so if you can persuade people to to give you the money then it’s quite a good way of

raising Finance but the downside to that is it can be quite challenging to persuade people to part with their money because usually you’re not giving up any

Shares in your business or anything like that you might have to tempt them in with promises of discounts or little perks that you could give them for your products that you might be selling down the line now some businesses might turn to the government for funding in the form of

government grants which would be a fantastic source of Finance if you can persuade the government to give you a grant because they don’t need to be repaid at all

it’s not just that the interest doesn’t need to be repaid the Capital doesn’t need to be repaid on grants either but the problem with that is they can be quite difficult to access so the government doesn’t just go around giving grants to any business

you’d have to really justify why you would be deserving of a government grant maybe doing something that’s really beneficial for the environment or having a positive impact on the local community for example as well and the final one of our external sources of

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance is probably the most common source of Finance

particularly for public limited companies would be to issue Shares to the general public and so they can buy a share in your company and you use the the money that they use to purchase that share to fund any expansion that you want to do which is a great source of

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance because there isn’t the repayment that you would have on a Loan there isn’t the interest that you would have on a Loan but the

other side to that is that you’re diluting down the control of your company and also those shareholders may expect a dividend which is basically a return um as a as a reward for them buying those Shares so you might need to pay Dividends to those shareholders

over time as well even though interest would not be due