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Sources of Finance (UK)
Transcript of Sources of Finance (UK)
In your exercise books head up our new title "Financing a Business"
Subheading: Why does a business need money?
Come up with 7 reasons why a business needs money.
Money spent on Day-To-Day expenses which DO NOT involve the purchase of a long term asset.
Revenue Expenditure vs Capital Expenditure
Money spent on assets which will last for more than one year.
In your book, write down the example and say if it is Capital or Revenue expenditure.
A new car
A new building
A new coffee machine
Maintenance of the coffee machine
Come up with two of your own examples of:
- Capital expenditure
- Revenue expenditure
Reminder: Assets are items of value which are owned by the business e.g. land, buildings, equipment and vehicles.
So what exactly is finance?
Finance in GCSE Business studies is about the process of getting the money needed to run the business.
We're going to learn about how a business can get enough money to cover small expenses (revenue expenditure) and large expenses (capital expenditure).
A business is unlikely to have large amounts of cash sitting around, waiting to be used. Any spare cash is often invested somewhere where it will earn a return (profit).
This is money which is obtained from within the business itself e.g. retained profit or selling stocks to raise cash.
This is money obtained from individuals or institutions outside of the business e.g. bank loans
There are two main ways that a business can obtain finance...
Internal Sources of Finance
Retained Profit – The profit kept back and used to invest in the business.
Retained profit does not have to be repaid (like a loan does).
A business may not have enough retained profit to expand.
Asset sales – the sale of assets that are not required by the business.
Makes better use of assets that are not being used.
It may take time to sell the assets and new businesses may not have any assets to sell.
Owners savings – a sole trader or member of a partnership can put more of their savings into a business.
The business doesn’t have to pay any interest.
Owners may not have any more savings to contribute.
External Sources of Finance
A business is able to spend more money than they have. A very good short term finance option.
Interest rates may be higher than a normal bank loan.
Bank overdraft - when a bank account goes into a negative balance.
Interest is only paid on the amount overdrawn.
Issue of shares – (only available to limited companies).
May be able to raise large amounts of money.
If too many shares are sold the ownership of the company could change hands.
No interest has to be paid.
Owners may expect dividends.
Bank Loans - a loan from a bank can be short term (3 years or less), medium term (up to 10 years) or long term (10+ years).
Large businesses may be offered lower rates of interest as they are seen as low risk.
A bank loan will have to be repaid with interest.
A bank may require some property as security. If the borrower doesn’t pay, the bank will sell the property.
Use www.gumtree.com/london to find a car that you think you would like to buy.
Put the cost and the repayment period (5 years) in to the calculator on the website below.
Buying your first car...
Use Gumtree to find a house that would be suitable to buy as your first house. It can be from any area in London but beware - the more affluent the area, the more expensive the house!
Use the calculator below to find out how much your monthly repayments would be.
Use the interest rate 4.49%
Use a repayment period of 30 years
Buying a house - is it possible?
Some practical examples...
On the other side of the page are three situations that require your specialist advice. In each situation you are faced with revenue and capital expenses that require finance. You are expected to complete
at least two
of the three tasks. Your answer should be written in essay format.
The three situations are:
The Rugby Team
The Recording Artist
The Ice Cream Cart
Question: Which source of finance should I choose?
The amount of £ required and
The length of time the finance is needed for.
The asset you're looking to get.
You're in the mood for a shopping spree. You head out and find 8 items that you've been wanting to buy for ages.
Find 8 items (link their web addresses) on the Internet that you want to buy (£)
Add the total value of these items together. You've decided to put all of these items on your credit card.
Use the following website to find the interest rate (
) for a credit card: (http://www.money.co.uk/credit-cards/all-credit-cards.htm)
Using the interest rate, put the details of your credit card purchase into the following website to find the real cost of your purchase. https://www.sorted.org.nz/calculators/debt#tab-credit-card
MAIN POINT: How much extra did it cost you to buy using your credit card? What lesson can we learn from this?
Bonds - a bond is similar to a loan (5-25 years) but is borrowed from a variety of investors including insurance companies and private investors.
Interest is fixed for the life of the bond.
Bonds can be traded between owners.
If the interest rate is fixed at a high rate, the business still has to pay it.
Write the numbers the calculator gives you into your exercise book. How much EXTRA will it cost you?