Raising Finance

Why Businesses Need Finance

Start-up Costs

- Some of these will be large one-off payments for things like premises and equipment.

-Business may also need help with costs such as wages and raw matierials until the business becomes established. 

Day-to-Day

- Without sufficient cash the business will not be able to pay it's bills on a day-to-day basis and may get into trouble. 

-This means that additional finance - working capital - is needed on a temporary basis to cope with cash flow problems.

Depreciatation

- Is a term that describes the loss in value of assets (things of value).

- Machinery wears out and needs replacing, buildings need repairing and computer systems need upgrading. All of this may require finance.

Expansion

- May be in the form of physical expansion such as new buildings, extra productive capacity or increasing sales by launching into new markets with extra promotion and distribution costs. 

-All of this will need finance to pay for it.

Internal and External Finance

Businesses can choose between a wide range of internal and external sources of finance; each will have advantages and disadvantages. Some are more suited to particular situations or types of businesses than others. 

Internal Finance

- Money that comes from inside the business.

- Usually cheaper than external finance because there will be no interest payments.

Types of Internal Finance

Owner's capital: personal savings: - savings, inheritance, redundancy.

- Does not have to be repaid and carries no interest charges.

- Owner risks loosing everything.

- Best for starting a small business.

Retained Profit: - The profit that remains after tax bills and dividends have been covered.

- Belongs to the business already; does not involve debt.

- No need to repay it and no interest to pay.

- May not be enough to meet finance needs.

- Useless for start-ups; they will not have any retained profits.

- Best for expanding an existing business.

Sale of Assets: - e.g. land, vehicles, property or machinery. 

- These assets can be sold to raise finance that does not need to be paid or carry interest charges.

- Only useful if business does not need the assets. 

- Unsuitable for start-ups as they are unlikely to have any.

- Best for raising money quickly

External Finance

- Money that comes from outside the business.

All businesses need working capital to cover expenses that are not immediately covered by sales revenue. This is particularly important for a new business because there will be many up-front costs involved in setting up a business.

- More numourous than internal sources.

- Most businesses will have to rely on them at some time.

- Carry a cost.

- Loans require interest payments and have to be repaid in either regular instalments or at a future date.

- Shares bring in funds but shareholders often expect dividends and may want to be involve in the control of the business.

- Banks frequently require collateral - some asset that can…