It is often used as a short term source of finance (e.g. selling a vehicle to pay debts) but could provide more longer term finance if the assets being sold are very valuable (e.g. land or buildings).
If a business wants to use its assets, it may consider sale and lease-back where it may sell its assets and then rent or hire it from the business that now owns the assets. It may mean paying more money in the long run but it can provide cash in the short term to avoid a crisis.
Sale and Leaseback
A sale and leaseback allows a company to raise money from the sale of assets.
When a business makes a profit and it does not spend it, it keeps it and accountants call profits that are kept and not spent retained profits.
It is also an in which one a to a and the buyer immediately the property back to the . This arrangement allows the initial buyer to make use of the .
External Sources
This is finance that comes from outside the business. It involves the business owing money to outside individuals or institutions
There are a number of different external sources that can be used to fund a business. Some of these are outlined below:
- Banks-
- Building Societies
- Hire Purchase
- Leasing
- Venture capitalists
- Factoring
- Share issues
- Friends or family
- Government grants and Prince’s Trust and loans and grants
- Personal savings
Banks
Borrowings from banks are an important source of finance to companies. Bank lending is still mainly short term, although medium-term lending is quite common these days.
Short term lending maybe an overdraft, which a company should keep within a limit set by the bank. Interest is charged at a variable rate on the amount by which the company is overdrawn from day to day.
Building Societies
Building societies are also able to offer loans, business accounts and overdraft facilities based on the business plan.
Hire Purchase
With a hire purchase agreement, after all the payments have been made, the business customer becomes the owner of the equipment. This ownership transfer either automatically or on payment of an option to purchase fee.
Leasing
Leasing is a contract between the leasing company, the leaser, and the customer. The leasing company buys and owns the asset that the lessee requires. The customer hires the asset from the leasing company and pays rental over a period for the use of the asset. There are two types of leases:
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Finance Leases- A finance lease is a lease that is primarily a method of raising finance to pay for assets, rather than a genuine rental.
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Operating Leases- A for which the acquires the for only a small portion of its . An lease is commonly used to acquire on a basis. Any lease that is not a is an operating lease.
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Venture capitalists
Venture capital is money put into an enterprise which may all be lost if the enterprise fails. A businessman starting up a new business will invest venture capital of his own, but he will probably need extra funding from a source other than his own pocket.
The directors of the company must contact venture capital organisations, to try and find one or more which would be willing to offer finance. A venture capital organisation will only give funds to a company that it believes can succeed, and before it will make any definite offer, it will want from the company management:
- a business plan
- details of how much finance is needed and how it will be used
- the most recent trading figures of the company, a balance sheet, a cash flow forecast and a profit forecast
- details of the management team, with evidence of a wide range of management skills
- details of major shareholders
- details of the company's current banking arrangements and any other sources of finance
Factoring
Debt factoring is another method of gaining additional sources of Finance. This means that the business sell its debts to another company and receives some of the money immediately. The debt factoring company collects the debts and takes a percentage cut for this service.
Share issues
Issuing shares is a good strategy for companies to raise finance. Small business will be able to issue shares whey they move from being sole trader to become public limited (PLC).Shares will not be sold to anyone.
Friends or family
Approaching family and friends for funding can be an easy and flexible route to finance. Approached in the right way, this type of funding can provide a fast, affordable solution to your loan requirements.
Friends and family are more likely to be able to:
- offer you a low interest loan or one with no interest attached at all
- lend to you over a longer period than conventional sources
- adjust the terms of the loan during the loan period
Government grants and Prince’s Trust and loans and grants
You will need to apply for grants through your local council, which will have a list of what’s available. The location you’re planning to start up your business.if the business is based in an area that is undergoing regeneration, there is likely to be more money available for start-ups.
Before applying for a grant, you should prepare a business plan working out how much money you need to start and whether there is a market for what you are doing.
Prince’s trust offers two types of grants:
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- Development Awards are grants to help you get into education, training or employment. Development award can be used to buy clothes for a job interview or a new job, covers your fees for training course and its pays for travel costs to a work placement training course or job. You get a grant which is up to £500.this grant is not for university fees and organisations.
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Community Cash Awards- Community Cash Awards are grants to help you set up a project that will benefit your community. You get a grant of up to £5000 to support and help plan your project, research your budget, set goals and learn about your community.
Projects must be run and managed by people between 16-25.it must clearly benefit the community, the people running the project and be a new or developing project.
Personal savings
Personal savings are amounts of money that a business person, partner or shareholder has at their disposal to do with as they wish. Although we would generally discuss personal savings as a source of finance for small businesses, there are many examples where business people have used substantial sums of their own money to help to finance their businesses.
A Jamie financed his new restaurant, 'Fifteen', using fifteen raw recruits to the catering trade and a large amount (£500,000) of his own cash. Good and very public example here is Jamie Oliver, the television chef.
