Sources of Finance for a Business Start-Up
Length: 1480 words (4.2 double-spaced pages)
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For this task I will be considering the sources of finance I will need for my company.
Why might a business require finance?
A business may require finance because they can either:
• Be setting up a new business and they do not have enough money to start up.
• They may need new equipment to help make the business expand and make more profit.
• Or they may even want to replace old machinery.
• They may want to move there store to a better location that might benefit there company more.
• Or they may want to take over another company.
Additional finance can help a company keep trading while it is waiting for it payments for its last sales. It allows a business to meet ongoing costs of operation or help them to expand.
Sources of finance can be put into two categories Internal and External. Internal finance is money that comes from inside of a business or any profit that you have made from your business and external is money that you get from outside of the business. For internal finance you can retain profit, reduce stock levels or sell you old assets but for external finance you have more choices you can borrow money from family or friends to help you out, you can get a grant from the princes trust but this will only happen if you have a good idea for what you need the money for and you can get a loan from the bank. The difference between a loan and a grant is a loan you don’t have to pay back but a grant you do because it is from the bank. There are other types of finance:
• Trade credit
• Hire purchase
• Share issue
• Taking a new partner
The most appropriate source of finance for my business is:
Grant- a grant is given to you by the Prince’s Trust. You will only receive this if they think you have a good ides for a business. Grants are similar to loans but grants are better because you don’t have to pay back. This source of finance is good for any business simply for the fact you don’t have to pay back. The drawbacks of getting a grant are very minimal it could even be non-existent. One complaint may be the long application progress how ever it will no longer be an issue when you are rewarded with free money.
This resource is very appropriate for my business because I will have to be buying high quality cars.
Loan- A bank loan is an amount of money given to you from the bank that is usually only given to you for a valuable reason and for a certain period of time. This will only be suitable for my business when I am first starting up. Not only could it be use for that but it can be used for the development of your company. When my business makes enough profit I will give back the money to the bank. The disadvantage of getting a loan is if your business doesn’t do very well how will you be able to pay the bank back. The level of loan repayments will be calculated by the bank when the loan has been agreed. Usually the first payment will be a month after you receive the loan. This could be a disadvantage because you may not make enough money in the first month so this could slow down the progress of the business. But it all depend on how much money you are expected to pay a month.
Taking a new partner
Taking a new partner means finding someone else to go into partnership with you. Businesses might do this because they need someone to help them pay for the business or they need help in decision making. Finding a partner can introduce capital to the firm. It can also increase the level of expertise in the business. This can be beneficial because there is someone to cover for you when you want to pull a sicky.
The draw back of finding a new partner is if you fall out with your partners this could be a big problem or if the other partner decides to leave the partnership will dissolve. As you know profit will have to be shared and they still have limited liability meaning all partners are responsible for debts.
Leasing means renting a capital item such as a car or machinery or selling goods that your company dose not own. After a fixed time or period it will be sent back to it original owner. This method of finance is good my business because it is a car rental company and this type of finance is made for these sorts of companies. Not only can I lease my products but I can lease my premises as well. Leasing is an alternative to buying money assets. As we all no buying these types of merchandise can be very expensive especially for a new business like my self. Leasing helps new firms with there cash flow. I can find this source by researching leasing companies. There are two type of leasing methods:
Direct lease- A company chooses an asset it want to require form an leasing company and the leasing company rents it to you business for a period of time and eventually you will have to return it back to the leasing company after customers use it. Sometime the leasing company will allow the business to buy the asset for a good price.
Leaseback- this is like the opposite of direct lease. Your company own as an asset and leases it to and leasing company and the company leases it to you. The leasing company now owns that asset.
The drawbacks of leasing a car are:
• you can't use a leased asset as collateral for a future loan,
• interest rates can be very high (so be sure to negotiate it before committing),
• some lease terms are longer than the life expectancy of the asset, so make sure that you don't get stuck making payments on obsolete equipment,
• one missed payment can trigger a repossessions,
• leases are long term and can be hard to get out of,
• a thorough examination your credit history,
• a requirement that you pledge additional collateral to secure the equipment,
• a requirement for copies of your personal tax returns
Hire purchase means obtaining assets for a period of time and after a final payment they automatically become the property of the user. Hire purchase is very similar to leasing. You choose an asset from the leasing company and you make regular payments to the company in exchange for the right to use the asset. The asset remains property of the leasing company until the last payment is made after that the asset officially belongs to you and you can do what ever you want with it. You can either sell it again or rent it out which is what I will be doing. This is a quick and easy way to raise capital. The draw back of this asset is the company doses not own the goods so if repayments are not prompt the asset can be reclaimed by the leasing company.
Mortgage is a large loan given to you to but you property that you are using. Most mortgages last for 25 years and the property you want to buy are usually kept secure. This source of finance is reason able for by business because I will not have enough money to buy the mortgage because it is a new business and I don’t have 25 years to repay them back. Buy this time my business should have expanded tremendously so I will not have any problems paying it back. If the mortgage is less then the value of the property or it is mortgage free the mortgage can be raised for any reason. This resource is good for entrepreneurs who own the property. The draw backs of this source of finance:
• Monthly repayments- with mortgage you are expected to make a monthly payment if you are unable to do this your property can be taken away from you.
• Variable interest rates-Most people in the UK who get a mortgage choose a variable mortgage. This means that your monthly repayments are dependent upon changes in the base rate (set by MPC). This can be a disaster when interest rates increase
• Lack of flexibility-
• Deposits- with mortgages you have to pay a 5% deposit when you first purchase. It may be a problem you are unable to do this.
• Profit prices have increased- in the U.K property prices have increased faster then incomes and the cots on renting. This means that a mortgage takes an increasing % of disposable income.