Sources of Business Finance
Business: Edexcel GCSE, topic 1.3.12
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 describes when firms pay suppliers at a later date. It involves buying something now and paying for it later.
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
- 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
- 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
- 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
- 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
- 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 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 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.
Test yourself on Sources of Business Finance
When PSG bought Kylian Mbappe from Monaco, they chose to complete the purchase in multiple stages. What is this an example of?
What are some short-term methods of finance?
Which of the following is NOT a short-term source of finance?
When a business sells shares for a % of the business, which method of finance is this business using?