Finance

A summary of the Finance unit of GCSE Business Studies.

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  • Finance
    • What does a firm need finance for?
      • To start up. E.g. pay for premises, new equipment and advertising.
      • Run the business .E.g. have enough money to pay wages and suppliers on time.
    • Finance refers to sources of money for a business.
    • New businesses find it difficult to raise finance because they usually have just a few customers and many  competitors.
    • All businesses need finance. There are a number of funding sources used by organisations.
    • Lenders are put off by the risk that the start-up may fail. If that happens, the owners may be unable to repay borrowed money.
    • Sources of Finance
      • Short Term-These need to be paid back within a year
        • An overdraft facility, where a bank allows a firm to take out more money than it has in its bank account
        • Trade credits, where suppliers deliver goods now and are willing to wait for a number of days before payment.
        • Factoring, where firms sell their invoices to a factor such as a bank. They do this for some cash right away, rather than waiting 28 days to be paid the full amount.
      • Long Term-These can be paid back over a number of years
        • Owners who invest money in the business. For sole traders and partners this can be their savings. For companies, the funding invested by shareholders is called share capital.
        • Loans from a bank or from family and friends.
        • Debentures are loans made to a company.
        • A mortgage, which is a special type of loan for buying property where monthly payments are spread over a number of years.
        • Hire purchase or  leasing, where monthly payments are made for use of equipment such as a car. Leased equipment is rented and not owned by the firm. Hired equipment is owned by the firm after the final payment.
        • Grants from charities or the government to help businesses get started, especially in areas of high unemployment.
    • Creditors and Debtors
      • A creditor is an individual or business that has lent funds to a business and is owed money.
      • A debtor is an individual or business who has borrowed funds from a business and so owes it money.
      • Money borrowed from creditors is paid back over time, usually with an additional payment of interest. Interest is the cost of borrowing and the reward for lending.
      • Creditors often ask for security  before lending funds. This means sole traders and partners may have to offer their own house as a guarantee that monies will be repaid. A company can offer assets, e.g. offices collateral.
      • The type of finance chosen depends on the type of business. Start ups and small firms are considered very high risk and find it difficult to raise external finance.
      • The only source of funds might be the owner's own savings, retained profits and borrowing from friends. Companies can issue extra shares to raise large amounts of capital in a rights issue.
  • To start up. E.g. pay for premises, new equipment and advertising.

Comments

Bobby sanghera - Team GR

Really good for revision! Well done!

cronge2

doesn't include short term finance.

cronge2

doesn't include short term finance.

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