1.3.12

Sources of Business Finance

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Short-Term Methods

Sources of finance (e.g. banks, investors or suppliers) are ways that businesses can raise money to fund their operations and growth. Methods of finance are the ways that a source can offer finance. Some short-term methods of finance are:

Trade credit

Trade credit

  • Trade credit describes when firms pay suppliers at a later date. It involves buying something now and paying for it later.
Hire purchases

Hire purchases

  • This is when a business buys something and instead of paying for it upfront pays for it in instalments.
    • E.g. when PSG bought Kylian Mbappe from Monaco, they didn’t pay the whole amount at the time and instead completed the purchase in different stages.
    • E.g. If a company bought machinery worth £1,000, a hire purchase scheme may allow them to pay £100 a month for 10 months rather than pay £1,000 up front.
Overdraft

Overdraft

  • This is when a bank lets a business spend more money than the amount of cash that they have in their current account.

Long-Term Methods of Finance

Businesses can use the capital (money) to initially start up, to fund new investments for growth or to support a business if it is struggling. Some long-term methods of finance are:

Retained profit

Retained profit

  • This is profit that the business has effectively saved whilst it has been operating.
  • Retained profit is a cheap source of finance because a business does not have to pay any interest.
  • Retained profit is limited, so a business can only spend profits that have been saved. It may not be enough to fund large long-term projects.
Personal savings

Personal savings

  • This is personal money that is invested by the owner of a company.
    • It is most relevant for start-up companies, in which the entrepreneur has saved up to fund their business venture.
    • A downside is that it can be very risky for an entrepreneur to put a significant amount of their personal savings into a business.
Venture capital

Venture capital

  • In venture capital, experienced business people with access to large amounts of capital offer investment for a portion of the company in return.
  • A downside to this is that the entrepreneur may lose some control of the business decisions.
  • Some venture capitalists encourage the businesses that they invest in to take a lot of risks, which can be good or very bad for the business.
Share capital

Share capital

  • A firm can sell share capital (some of its shares) to other people or companies. They give away a percentage of the company in return for getting finance invested in the business.
    • This is usually what happens on Dragon’s Den on the BBC.
  • Public limited companies may do new share issues, creating shares and issuing them to investors through a stock market.
  • Private limited companies can sell share capital (shares) to family, friends or even a private equity company.
Bank loans or mortgages

Bank loans or mortgages

  • Bank loans and mortgages are very important for many businesses. A business borrows money from a bank and then pays interest on the money borrowed.
  • It is often harder for new businesses to get bank loans because banks see them as riskier.
Crowdfunding

Crowdfunding

  • Crowdfunding is often done over the internet. It involves encouraging investors (usually individuals) to put in small amounts of money into a specific business or venture.
  • The Oculus VR headset was initially crowdfunded by individuals who pledged (put in) $2.4m in 30 days.
Jump to other topics
1

Investigating Small Business

1.1

Enterprise & Entrepreneurship

1.1.1The Dynamic Nature of Businesses1.1.2Risk & Reward1.1.3The Role of Business Enterprise1.1.4The Role of Business Enterprise 21.1.5The Role of the Entrepreneur1.1.6End of Topic Test - Dynamic Nature of Business1.1.7Grade 9 - Dynamic Nature of Business
1.2

Spotting a Business Opportunity

1.2.1Customer Needs1.2.2Market Research1.2.3Market Segmentation1.2.4The Competitive Environment1.2.5Primary & Secondary Market Research1.2.6End of Topic Test - Business Opportunities1.2.7Application Questions - Business Opportunities1.2.8Exam-Style Questions - Market Segmentation1.2.9Diagnostic Misconceptions - Competition
1.3

Putting a Business Idea into Practice

1.3.1Business Aims1.3.2Business Objectives1.3.3Business Revenues & Costs1.3.4Costs - Calculations1.3.5Revenue - Calculations1.3.6Business Profits & Break-Even Analysis1.3.7Profits & Losses - Calculations1.3.8Interest - Calculations1.3.9Cash & Cash Flow1.3.10Cash & Cash Flow 21.3.11Cash Flow - Calculations1.3.12Sources of Business Finance1.3.13End of Topic Test - Business in Practice1.3.14Grade 9 - Business in Practice1.3.15Exam-Style Questions - Business in Practice1.3.16Diagnostic Misconceptions - Profit1.3.17Diagnostic Misconceptions - Company vs Business1.3.18Diagnostic Misconceptions - Economies of Scale1.3.19Diagnostic Misconceptions - Cash Flow1.3.20Diagnostic Misconceptions - Break-even1.3.21Diagnostic Misconceptions - Fixed Costs
1.4

Making the Business Effective

1.4.1The Options for Start-Up & Small Businesses1.4.2Limited Liability1.4.3Franchising & Not-For-Profits1.4.4Business Location1.4.5The Marketing Mix1.4.6Business Plans1.4.7End of Topic Test - Effective Business1.4.8Application Questions - Effective Business1.4.9Exam-Style Questions - Business Plans
1.5

Business Stakeholders

1.5.1Business Stakeholders1.5.2Technology & Business1.5.3Legislation & Business1.5.4Legislation & Business 21.5.5The Economy & Business1.5.6External Influences1.5.7End of Topic Test - Business Stakeholders1.5.8Grade 9 - Business Stakeholders1.5.9Diagnostic Misconceptions - Recessions
2

Building a Business

2.1

Growing the Business

2.1.1Business Growth2.1.2Finance2.1.3Changes in Business Aims & Globalisation2.1.4Ethics & Business2.1.5The Environment & Business2.1.6End of Topic Test - Growing a Business2.1.7Application Questions - Growing a Business2.1.8Exam-Style Questions - Business Growth
2.2

Making Marketing Decisions

2.2.1Product2.2.2Product Life Cycle2.2.3Price2.2.4Pricing Methods2.2.5End of Topic Test - Product & Price2.2.6Grade 9 - Product & Price2.2.7Promotion & Advertising2.2.8PR & Sales Promotions2.2.9Sponsorship & Product Placement2.2.10Promotional Mix2.2.11End of Topic Test - Promotion2.2.12Application Questions - Promotion2.2.13Exam-Style Questions - Promotional Mix2.2.14Place & Wholesalers2.2.15Direct to Consumer2.2.16E-commerce & M-commerce2.2.17Diagnostic Misconceptions - Decreasing Price2.2.18Diagnostic Misconceptions - Advertise vs Promote2.2.19Diagnostic Misconceptions - Social Media
2.3

Making Operational Decisions

2.3.1Job Production2.3.2Batch & Flow Production2.3.3Working with Suppliers2.3.4Effective Supply Chains2.3.5Just In Time & Just In Case2.3.6Managing Quality2.3.7Total Quality Management2.3.8The Sales Process2.3.9End of Topic Test - Operational Decisions2.3.10Grade 9 - Operational Decisions2.3.11Exam-Style Questions - Managing Stock2.3.12Diagnostic Misconceptions - JIT vs JIC
2.4

Making Financial Decisions

2.4.1Gross Profit & Net Profit - Definitions2.4.2Gross Profit - Calculations2.4.3Net Profit - Calculations2.4.4Rate of Return2.4.5Rate of Return - Calculations2.4.6Research & Financial Data2.4.7Marketing Data2.4.8Percentage Change - Calculations
2.5

Making Human Resource Decisions

2.5.1Organisational Structures2.5.2Organisational Structures 22.5.3Recruitment2.5.4Effective Recruitment2.5.5Training a Workforce2.5.6Motivating a Workforce2.5.7End of Topic Tests - Human Resources2.5.8Application Questions - Human Resources2.5.9Exam-Style Questions - Human Resources2.5.10Diagnostic Misconceptions - Owners vs Shareholders2.5.11Diagnostic Misconceptions - Internal Recruitment2.5.12Diagnostic Misconceptions - Employee Motivation

Practice questions on Sources of Business Finance

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  1. 1
    When PSG bought Kylian Mbappe from Monaco, they chose to complete the purchase in multiple stages. What is this an example of?Multiple choice
  2. 2
    What are some short-term methods of finance?Fill in the list
  3. 3
    Which of the following is NOT a short-term source of finance?Multiple choice
  4. 4
    Short term methods of finance:True / false
  5. 5
    When a business sells shares for a % of the business, which method of finance is this business using?Multiple choice
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Cash Flow - Calculations

End of Topic Test - Business in Practice