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Sources of finance for a new business.

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Task 3 Obtaining Finance Often the biggest hurdle for an entrepreneur to jump is being able to raise sufficient capital to get their enterprise started. In the real world, there are many ways in which an entrepreneur can do this. But for us, we are restricted to only a few. Own capital The cheapest and easiest way for an entrepreneur to invest capital into the business in investing their own money. An entrepreneur's own capital may not always relate to money. He/she may have already bought other pieces of equipment that he/she already owned into the business. This would be valued alongside the money invested in the business in order to calculate the capital the owner has contributed to the business. Investing one's own money into the business also brings opportunity cost. If an entrepreneur invests their own money into the business enterprise, they are taking on all financial risks. If the venture goes horribly wrong, they could lose all their investment. If the business is a sole trader or partnership, like most business ventures when they first begin, the entrepreneur(s) will be responsible for all the business's debts from their own personal wealth. However if the business only has limited liability, the form of liability that private and public limited companies have, the owners will only lose what they originally invested and their own personal wealth is protected. In our enterprise activity, we had an opportunity to invest our own capital into the venture. Family and friends If an entrepreneur doesn't have sufficient funds to start their own business on their own, they may wish to persuade their family and friends to invest in their venture. While your own immediate family may be easily persuaded and lend you money without many conditions, it would be less likely that distant relatives and friends will do the same. ...read more.


The number of shares the venture capitalist requests depends on the size of the loan. This type of finance is only suitable for limited companies that have sufficient shares to sell. Venture capitalists are attracted to rapid growth and are unlikely to be suitable for businesses that require an investment of less than �100,000, or an annual return of lest that 25% on the investment. The disadvantage of this type of investment is the high rate on returns and the requirement to give up a large stake in some of your own business. Business Angels are wealthy entrepreneurs who provide capital in return for being part of a growing organisation. If an entrepreneur want funds between �10,000 and �250,000 this could be an option of raising capital. One of the disadvantages is the entrepreneur has to develop a close working relationship with their Business Angel who will expect to "get their hands dirty" with the venture. Business Angels can determine how and when they receive their financial rewards from the business and this may take the form of a salary. One advantage is that most angels are very experienced business people can they can be a useful addition to the business team. Venture capitalists would not be an appropriate investment option as they would expect a return on the profits. They would not receive anything because all the profit would be going towards the school and activities on the final week of the school year. Share capital If you were to start a new private limited company, you would offer shares to selected people eg family, friends, or business acquaintances. These potential shareholders would buy a percentage of the business's shares at an agreed price. ...read more.


* Marketing plan - You have to say how you are going to market your product/service to potential customers, outlining any assumptions that you have made. * Credit control - How is the business going to manage credit control, monitor debtors and creditors? How will it manage stock control and other expenditures? What procedures will you put in place to ensure that these difficulties are avoided? If a business is seeking finance, you must include: o Loan repayments - How will the loan be repaid? When will potential investors get their money back? o Cash flow forecast - This will show how much money the business expects to have flowing into and out of the business. It should clearly show the amount of funding needed and clearly state and emergency plans that are in place should the business encounter any financial problems. o Forecast financial accounts - These two documents will forecast potential profit and assets held within the business. Winning support from potential investors If you are able to present all of your documents to a potential investor well, you will be on your way to securing finance for your enterprise venture. It is very important to be completely honest and realistic with your investors when you are discussing predictions concerning revenue and expenditure. The third party will have a better idea of any potential hazards that could arise and can advise accordingly. If it seems like people are being very negative and pessimistic about the initial plan or idea, they are not trying to be. They are merely being realistic. You will also need to make sure that all your facts and figures are as accurate as possible. This will show your potential investor that you have one of the most important skills an entrepreneur can have - the ability to organise and use financial information correctly. ...read more.

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