Sources of Finance and Starting a Business Finance Essay

Bank Overdraft

Most businesses have an account with a bank. The bank deals with all the deposits (money put into the account) and withdrawals (money taken out). Most banks know that businesses do not always receive money from sales straight away. If you run a sandwich bar in a local trading estate then you might get money straight away when you sell your sandwiches. If you are a business selling electrical equipment to an electrical retailer then you may not get paid straight away when you deliver your goods.

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.

Credit Card

A credit card works very much like trade credit. If you buy something using a credit card, you will receive a statement once a month with the details of the amount spent during the last month. You then have a certain period of time to either pay the full amount or a minimum amount.

Lease

Most businesses have to buy equipment and machinery of some sort. Many firms have a fleet of company cars which certain staff uses or vehicles that they use for distribution. There are a number of ways of buying these things. The business might go to the bank for a loan, arrange some sort of finance deal with the supplier, and use cash they have in the business or arrange a lease option.

Bank Loans

Bank loans are very flexible. They can vary in the length of time that the loan has to be repaid. Loans arranged with a bank that are less than one year are regarded as short term finance. As with any other form of loan there are interest payments to be made and this can be expensive and also can vary.

Long term sources of finance

Shares

A share is a part ownership of a company. Shares relate to companies set up as private limited companies or public limited companies (plcs). There are many small firms who decide to set themselves up as private limited companies; there are advantages and disadvantages of doing so. It is possible, therefore, that a small business might start up and have just two shareholders in the business.

Venture Capital

Venture capital is becoming an increasingly important source of finance for growing companies. Venture capitalists are groups of (generally very wealthy) individuals or companies specifically set up to invest in developing companies. Venture capitalists are on the look out for companies with potential. They are prepared to offer capital (money) to help the business grow. In return the venture capitalist gets some say in the running of the company as well as a share in the profits made.

Government Grant

Some firms might be eligible to get funds from the government. 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. In Cornwall, for example, there have been a number of initiatives to encourage new businesses to locate there.

Bank Loans

As with short term finance, banks are an important source of longer term finance. Banks may lend sums over long periods of time - possibly up to 25 years or even more in some cases. The loans have a rate of interest attached to them. This can vary according to the way in which the Bank of England sets interest rates. For businesses, using bank loans might be relatively easy but the cost of servicing the loan (paying the money and interest back) can be high. If interest rates rise then it can add to a businesses costs and this has to be taken into account in the planning stage before the loan is taken out. The source of finance selected by the HAYATABAD FAST FOODS is loan because we will not invest all available money into the business.

FACTORS FOR APPROPRIATE SOURCE

A business faces three major issues when selecting an appropriate source of finance for a new project: Can the finance be raised from internal resources or will new finance have to be raised outside the business? If finance needs to be raised externally, should it be debt or equity? If external debt or equity is to be used, where should it be raised from and in which form?

Can the necessary finance be provided from internal sources?

In answering this question the company needs to consider several issues: How much cash is currently held? The company needs to consider the amount held in current cash balances and short-term investments, and how much of this will be needed to support existing operations. If spare cash exists, this is the most obvious source of finance for the new project. If the required cash cannot be provided in this way then the company should consider its future cash flow. A cash budget can be prepared, but it is probably too detailed at this stage. A cash flow statement as shown in Example 1 would probably be more practical. Other factors can be The debt or equity decision Equity Finance Debt Finance Debt finance includes The duration of the loan Fixed v floating-rate borrowing Status of company Currency of borrowing

IMPLICATIONS

Implications of different sources of finance on a business are discussed below Implications of sources of finance can be good as well as bad for a business organizing firm Loan’s implications can be both good and bad or positive or negative. It’s easily available but the problem is that while paying the loan back to the bank, individuals or organization interest has to be paid which means we have to pay almost double of the amount we borrowed. Leasing also has its impacts like giving of installments but its good because it doesn’t make that much burden on firm The other sources of finance also have their impacts including positive and negative both. The implications on HAYATABAD FAST FOODS source of finance which it has taken mean loan is to pay the interest.

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