- Created by: Courtney lambert
- Created on: 01-02-17 21:39
Why Businesses Need Finance
- Some of these will be large one-off payments for things like premises and equipment.
-Business may also need help with costs such as wages and raw matierials until the business becomes established.
- Without sufficient cash the business will not be able to pay it's bills on a day-to-day basis and may get into trouble.
-This means that additional finance - working capital - is needed on a temporary basis to cope with cash flow problems.
- Is a term that describes the loss in value of assets (things of value).
- Machinery wears out and needs replacing, buildings need repairing and computer systems need upgrading. All of this may require finance.
- May be in the form of physical expansion such as new buildings, extra productive capacity or increasing sales by launching into new markets with extra promotion and distribution costs.
-All of this will need finance to pay for it.
Internal and External Finance
Businesses can choose between a wide range of internal and external sources of finance; each will have advantages and disadvantages. Some are more suited to particular situations or types of businesses than others.
- Money that comes from inside the business.
- Usually cheaper than external finance because there will be no interest payments.
Types of Internal Finance
Owner's capital: personal savings: - savings, inheritance, redundancy.
- Does not have to be repaid and carries no interest charges.
- Owner risks loosing everything.
- Best for starting a small business.
Retained Profit: - The profit that remains after tax bills and dividends have been covered.
- Belongs to the business already; does not involve debt.
- No need to repay it and no interest to pay.
- May not be enough to meet finance needs.
- Useless for start-ups; they will not have any retained profits.
- Best for expanding an existing business.
Sale of Assets: - e.g. land, vehicles, property or machinery.
- These assets can be sold to raise finance that does not need to be paid or carry interest charges.
- Only useful if business does not need the assets.
- Unsuitable for start-ups as they are unlikely to have any.
- Best for raising money quickly
- Money that comes from outside the business.
All businesses need working capital to cover expenses that are not immediately covered by sales revenue. This is particularly important for a new business because there will be many up-front costs involved in setting up a business.
- More numourous than internal sources.
- Most businesses will have to rely on them at some time.
- Carry a cost.
- Loans require interest payments and have to be repaid in either regular instalments or at a future date.
- Shares bring in funds but shareholders often expect dividends and may want to be involve in the control of the business.
- Banks frequently require collateral - some asset that can…