The document discusses various sources of short, medium, and long term finance for businesses. It identifies common short term sources like overdrafts, trade credit, and retained profits. Medium term sources include factoring, bank loans, and leasing. Long term sources involve share capital, asset sales, venture capital, and government grants. The document encourages matching finance sources to business structures like sole trader, private limited, and public limited companies.
2. Lesson objective:
To identify and understand, common types of finance
available to a business within the Short, Medium and
Long term timescale.
To research and produce a PowerPoint document listing
all appropriate finance options available to fund your
own business idea and their associated implications.
To match the source of finance available to 3 types of
business organisation i.e. Sole trader, Private Limited and
Public Limited.
3. Brief Introduction:
Finance is not just needed when starting a new business but
you may be required to seek further finance even if you’re
business is well established i.e. further expansion, R&D, new
product launch, legal fees, fines etc.
No matter what business you are in, you will always have to
ensure your business is adequately financed (Liquidity).
What is Cash Flow?
There are two categorise of finance methods and they are
either internal or external. Within these two categorise the
method of financing could be short, medium or long term.
5. Short term finance:
Money that is needed to finance activities that are usually going to last
less than one year.
Bank overdraft- An overdraft is an agreement with a bank to allow
the business to spend money it does not have - it is a form of a
loan.
Trade Credit- This is a period of time given to a business to pay for
goods that they have received. It is often 28 days but some
businesses might not pay for 6 months and on some occasions
even a year after they have received goods.
Retained profit- Profits from a business account can be used by the
owners for their own personal use or can be used to put back into
the business.
Credit cards- Using your own personal or business credit card. These
usually have high interest rate.
Owners' capital- The money may be the result of savings, money
left to them by a relative in a will or money received as the result of
a redundancy payment.
6. Medium term finance:
These may fall in either short or long term source of finance.
Factoring- Selling your credit loans to specialised companies who
buy your credit at lower price releasing your money to you.
Bank loans- Short/Medium/Long term. Negotiable. Fixed period of
lending, usually low interest rate.
Leasing out- A lease effectively means that the business is paying
for the use of a product but do not own it. It is also called 'hiring'.
You may also lease out unwanted equipment to raise cash.
Debentures- A form of stock market loan for Ltd companies which is
secured against your business assets. Failure to pay back loan on
time will result in seizure of those assets by your creditor.
7. Long term finance:
Used for financing the setting up of new businesses and for expansion of
existing businesses or new product launch.
Share capital- If you are a PLC (private/public) then you can raise shares by
selling ownership of your business on the stock exchange.
Asset sales- These assets could be in the form of
property, machinery, equipment, other companies or even logos of your
own business.
Venture capital- Venture capitalists are groups of individuals or companies
specifically set up to invest in developing companies. They may ask to be
part of making certain decision of the business!
Government, local authority or EU grants- This could be the local
authority, the national government or the European Union. These grants are
often linked to incentives to firms to set up in areas that are in need of
economic development.
Workforce restructuring- Moving employees into new posts or laying off
employees who have been working less than 2 years.
8. Activity 1
In groups, match the sources of finance
printed on the cards in categories of
Internal and External.
9. Limited Liability:
This is when your business owes money to your creditors and should
you fail to pay off your creditors, then they can only seize limited
amount of your assets. Debentures and Bank Loans.
Usually as a business owner you would limit your loan security to
your business assets only and not your personal assets.
To qualify for this protection your business must be registered as a
Limited company with the companies house (i.e. Private or Public).
10. Unlimited Liability:
This is when your creditors could seize anything of value from you to
recover their loan payment to you.
Sole Trader and Partnership business who are not registered with
the Companies House are usually within this category.
11. Activity 2
Open the following link on your web
browser and have a go at putting the
right types of finance in the right
category.
http://www.bized.co.uk/educators/level2
/finance/activity/sources11.htm
12. Task:
Now that you understand all the types of finance
available for a business, develop a table listing 3
types of business organisation of your choice.
(Sole, Partnership, etc.)
2nd column, write down the relevant sources of
finance each organisation could seek out for their
business needs.
Other columns, mention the advantages and
disadvantages of each source of finance.
13. Extension:
Now research and produce a PowerPoint document listing all
appropriate finance options available to fund your own
business idea.
Ensure you mention the name the organisation who will finance
your business.
Include any rates, repayment period and figures associated
with the finance deal on offer.
See if you can work out how much in total you will have to pay
for each type of finance.
