Finance

Finance

I am now looking into different sources of finance to show was I will get the money from. Some sources of finance are short term and must be paid back within a year and other sources of finance are long term and can be paid back over many years. I will need the finance to purchase materials, equipment, pay my employer’s wages and help me expand the business in the future.  These are the different types of finance I looked into are owners capital, shares, venture capital, bank loans, Retained profits, hire purchase, credit sale, leasing, factoring and bank overdraft.

Owner’s capital

This is the finance that I and my partner invest into the business. My partner and I both have 15,000 meaning that there is £30,000 going into the business. This finance is called internal finance as it is not separate from the business.

The advantages of this are that we won’t have to pay any interest as this money is our savings meaning it’s cheaper in the long term. However this money is limited and there isn’t enough of it to fully set up our business. By doing this it will also increase the risk that is taken between me and my partner as we could lose all our money if the business in not successful.

Shares

This source of external finance is only possible for private limited companies therefore I shall not be using this way in order to get capital. However it is important I am aware of this as later on i may want to become a company.

The advantages of having shares are that it is a permanent source of capital which will not have to be repaid therefore meaning no interest.

The disadvantages of this are that dividends are paid after tax whereas interest on loans is paid before tax is deducted. The dividends will also be expected by the shareholders. The main disadvantage is that my business may be taken over depending if many shares are sold.

Venture capital

Venture capital provide share capital and invest money in the form of loans. In return of this they expect an element of control over the company and will want a director on the board of the company. Venture capital company’s look at business with a good sales and profit potential.

The advantages of this that they can provide guidance and finical management, this can mean our business will be making better decisions meaning an increase in growth of your business.  Venture capitals are also well connected in the business industry. Can also acquire large sums of capital that will not be possible through bank loans or other methods.

However this can be quite challenging for a new small business as banks are wary of loaning money to a business without a two year record.

Bank loan

A bank loan is a sum of money that can be borrowed from a bank, this money must be repaid on top of interest.

The advantages of this are that they are quick to arrange and you can get money quick and easy, they also can be for a varied length of time. However a bank loan will have to be paid off and you end up spending more money as you have to pay interest on top as well. Also if the business fails to pay back the loan the bank has the right to sell their personal belongings, for example there house.