1. No category

METHODS
OF
OBTAINING
FINANCE
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WHY DO FIRMS NEED MONEY?
 To survive and pay bills
 To grow in size
WHERE CAN THE MONEY COME FROM?
 Holding back PROFIT which the business makes in order
to make more profit. This is known as an INTERNAL source
of finance.
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OTHER SOURCES OF RAISING MONEY
Sources from OUTSIDE the business are known as
EXTERNAL sources.
External sources can be:
 Long term sources
 Short term sources
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LONG TERM SOURCES OF FINANCE
 Selling more shares to people
 Putting more of your personal savings into the business
 Bank Loan/mortgage
SHORT TERM SOURCES OF FINANCE
 Overdraft
 Trade Credit – your supplier gives you time to pay
 Hire Purchase – can be used to buy equipment and vehicles –
small amount plus interest is paid each month until the item is
paid for in full. I
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HOW CAN THE GOVERNMENT HELP?
 Local Enterprise Councils
 The Loan Guarantee Scheme
 Reduced tax payments for smaller firms
 European Union – Regional development and Social Fund
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Read pages 23 - 25 of your course notes. Answer the following
questions in your jotter.
1.
Why do firms need money?
2.
What is the most important source of money to a business?
3.
Why should a business not pay out all its profits to
shareholders?
4.
Explain what is meant by an INTERNAL source of finance.
5.
Explain what is meant by an EXTERNAL source of finance.
6.
Give one advantage and one disadvantage of each of the
following sources of finance.
7.
o
Increasing the number of shares to the public
o
Arranging a bank loan with the bank manager
o
Arranging an overdraft with the bank manager
o
Taking advantage of trade credit
In what ways can the government help local business?
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OTHER METHODS OF RAISING FINANCE
DEBT FACTORING
Firms who require cash quickly might have trouble getting it
from debtors. (People who owe YOU money.)
A factoring business will offer immediate payment (take over
the debt – about 80%)
The company will charge a fee for this service.
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LEASING or RENTING
A method of using assets without paying the full cost of
ownership.
The customer makes payments to the owner of the asset for
using it.
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HIRE PURCHASE
 Goods bought and paid for over a period of time.
 The customer gets the use of the asset and makes
payments to a Finance Company.
 When all payments are made, the asset belongs to the
customer.
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Venture Capital/Business Angels
•Venture capital companies help small businesses and
entrepreneurs start up in return for a shareholding of the
business.
•Venture capitalist offer assistance when banks and other
lenders consider that there is too much risk in lending.
•The Dragons’ Den is an example or venture capitalists.
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Finance Questions 2
Explain the main source of internal finance
Describe 2 short term sources of finance. State an
advantage and a disadvantage of each source given.
Describe 2 long term sources of finance. State an advantage
and a disadvantage of each source given.
Describe “Debt Factoring”.
Suggest one advantage and one disadvantage of debt
factoring to an organisation.
Explain the role of a Venture Capitalist or Business Angel.
Suggest one advantage and one disadvantage of a business
angel to an organisation.
Design a poster outlining what you know about Sources of
Finance.
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