Obtaining finance

Long term sources of finance

• Share capital –
  Share capital is when people put money into the business and they own different percentages of the business.
  

  
  

Retained profit- This is the amount of money you keep back to give to the business. If you are an owner of a shop, you keep money for yourself for running the business. Or shareholders. Money that you give to your employees. Then retained profit is what you put back into the business, in order to make your business provide its goods. Or use it as dividend payment. The money could be made to make the business financially stronger.

Dividend- A share of the profits of a company received by shareholders who owns shares.

Leasing is when you rent equipment for your business instead of buying it

The advantage for this is that it is cheaper than actually buying the equipment

The disadvantage is that if it gets damaged then they charge you.

Shot term sources of finance

• Trade Credit- When a business orders supplies, its suppliers usually will allow a period of time before the supplies have to be paid. This is called trade credit. Normally this time period is 30 days. (invoice) this is a form of short term borrowing because good and services do not always have to be paid for immediately.

• Factoring-
  TEXT BOOK DEFINITION- A source of finance where a business is able to receive cash immediately for this invoices it has issued from a factor, such as a bank, instead of waiting the typical 30 days to be paid.
  MY DEFINITION- If your suppliers were a small business, then the bank would pay your suppliers for you for 30 days and at the end of those 30 days you would have to pay back the bank instead of your supplier.

Bank Overdraft – Balance of a bank account when funds withdrawn exceed funds deposited. The advantage of an overdraft is that money is only borrowed when needed which cuts down on the interest that has to be paid on borrowing. Some of the disadvantages of a bank overdraft facility are: you keep spending money even when you don't have enough cash to meet your spending and you pay an interest on the money you utilize as part of the overdraft.

Loans – A source of long-term finance. Ban loans to businesses tend to be for periods up to 5 years. Banks prefer to have security (or collateral as it is sometimes called) for a loan. Many small business owners offer their own home security. If they don’t repay the loan, the bank can force the house to be sold. The loan is then repaid from the proceeds of the sale. A loan is where property is offered as security is often called a mortgage. Bank loans have to be paid back with interest, usually in regular instalments at a fixed rate of interest, over a period of time. However, some bank loans have rates of interest which can change as interest rates in the economy change. The costs of these loans can go down or they can go up.

Grants – Some start up businesses are eligible for grants. Very small start-ups might get a grant from charities. Grants are also available through the government and the European Union particularly if the business is located in an area of high unemployment or where the government wants to encourage investment into the local economy. The advantage of a grant is that the money does not have to be repaid and there is no interest either. However, in some cases, there are conditions attached to getting and using a grant. For example, the business might have to promise to provide jobs for a number of people.

Which two of the following are examples of long-term finance for a high street chain of fashion shops? Select two answers:

A - An overdraft
B - Trade credit
C - A three year bank loan
D - New shares
E - A christmas sale

On which one of the followong would a business pay interest? Select one answer:

A - A bank loan
B - Shares
C - Personal savings
D - retained profit

Which one of the following is most likely to be an example of a type of finance where the lender can demand immediate repayment froma business which has borrowed the money?

A - An overdraft
B - A share
C - A bank loan
D - Retained profit