Different sources of Finance for Businesses

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Different sources of

Finance for Businesses

Introduction

This assignment will look at the different sources of finance that are available to a small business or a big company. With each source of finance listed the report will assess the implications that can arise and along with this the report will look at the cost to the business to taking a curtain source of finance.

All businesses need short-term finance from the very beginning to start up the business and to cover day-to-day running costs. This provides the business with working capital. However businesses also need long-term capital to help them to grow and expand, and this is paid back over a number of years. Without finance a business would find it difficult to accomplish anything, for example someone who decided to start up a shop would need finance at first to just buy the shop and the stock. Even a window cleaner would need finance to buy equipment such as ladders and buckets. But this can be taken onto a larger scale, as all businesses need finance at some point.

Different sources of finance

The report will now list the different sources of finance available, starting with sources available to small and new businesses to sources only obtainable to big companies.

External Sources of Finance

This source of finance comes from outside the business and involves the business owing money to an outside individual(s) or companies.

Personal Savings

This mainly applies to sole traders, partnerships and small private companies. Owners may use some of their own money as capital to invest in the business. Usually this option is used by the person(s) who will be running the business as it is a cheaper option than trying to get a loan from the bank. The downside being that if the business does not succeed then the person(s) will loose everything.

This is considered an external source as it is assumed that the money lent to the business will eventually be paid back to the private individual, sometimes with an extra amount to compensate the individual for the loan of the capital.

It can be a short or long term source of finance, depending upon the amount invested and the decision of the person using their savings.

Retail Banks

This source of finance is mainly used by new and small businesses as this heading includes the retail banks such as HSBC, NatWest, Barkley's and RBS. The reason that small businesses use these banks is that they offer different types of accounts such as a current or savings account as well as being able to offer overdrafts. Also money is easily transferable through electronic transactions, thus making it easer to pay suppliers and employees.

Whole sale Banks

These banks such as Morgan Stanley and Benson offer the same products and advantages as a retail bank, but the service comes at a premium as the minimum deposit that a business can make is £250,000.

Other whole sale banks include the foreign banks. They offer the same service, but as the currency is different a business could end up making extra or loosing revenue made through the currency changes.

Building Societies

A building society is a form of financial institution that is similar to a bank. It also provides loans but specialises in providing mortgages and usually its interest rates are lower than the level than that offered by a bank.

A mortgage is a special type of loan used to buy property (factories, shops, etc). Mortgages tend to be paid back over a long period of time, usually several years, at an interest rate. The idea is that the building society owns the property until the mortgage is paid off. This is so that if the person is late or cannot make payment on their mortgage the building society will have first rights from the sale of the property.

In recent years, the differences between banks and building societies have reduced and both are now very similar. Both can offer mortgages and loans.

Factoring Services

Businesses are often owed money from customers who have made a purchase on credit. The payment for the products would then be maid within a set amount of time. Usually a set amount of time will be about 30 days, which would be interest free to give a bigger incentive for the customer to pay the bill on time. After this time the company can charge a rate of interest on the money owed to them. Even with the threat of interest a business may have difficulty in collecting its debts from its customers, which could cause some financial difficulty for the company. For the company to be able to retrieve their money a special factoring company may offer to handle the debt collection process for a charge. The factoring company pays the business around 80% of the value of the debt first and would then collect the money from the debtor on behalf of the company. The factoring company would then take their 80% back and some profit from the 20% left over.
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Share Issue

This is an easy and important source of finance for public limited companies. A share issue involves a business creating new shares that will either be sold to existing shareholders or be sold to people or institutions through the stock exchange. Each share gives the shareholder a vote on the direction of the company. This means that the shareholder can elect the board of directors of the company each year. If the shareholder doesn't like the way the directors are running the business, they can elect new directors. This is a good incentive to the ...

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