Sources of Business Finance (Edexcel GCSE Business)

An arrangement with the Bank for business current account holders to spend more money than it has in their account 

A limit is agreed and interest is charged only when a business ‘goes overdrawn’

Offers significant flexibility and aids cash flow

An overdraft may be ‘called in’ if the bank is concerned about a business's ability to repay what it owes

Interest on overdrafts tends to be higher than on other loans

An agreement is made with the business suppliers to buy raw materials, components and stock which are paid for at a later date (typically 30 to 90 days)

Trade credit is usually interest-free

A business can increase its stock without having to immediately pay for it which can significantly enable a positive cash flow if the stock is sold before payment becomes due

Suppliers may prioritise delivery to customers who have the shortest repayment dates

Cash needs to be carefully managed to ensure the business has the money available to pay its suppliers on the agreed date

Share capital is finance raised from the sale of shares in a limited company

Large amounts of money can be quickly raised from wealthy investors

Shareholders who buy a large number of shares may also bring and share expertise, which can be beneficial to the business

Shareholders are the owners of shares and they are entitled to a share of the company’s profit when dividends are declared

Shareholders usually have a vote at a company’s Annual General Meeting (AGM) where they can have a say in the composition of the Board of Directors

A sum of money is borrowed from the bank and repaid (with interest) over a specific period of time

Bank loans are usually unsecured and are typically repaid over two to ten years

Interest rates are fixed for the term of the loan so repayments are made in equal instalments - which helps with business planning

Interest is payable and the business assets are at risk if the business does not make repayments as planned

Crowdfunding allows businesses to access finance provided by a large number of small investors on online platforms such as Kickstarter

The Business has to attain the target amount before any funds are released i.e they will not receive any funds even if they are just a few hundred £s short by the selected funding date

Investors are often attracted by incentives such as a sample or early access to a product

E.g. Flow Hive is a beekeeping system that was successfully funded on Indiegogo in 2015. The campaign raised $12.2 million from 38,470 backers

Businesses need to provide a persuasive business plan to convince individuals to invest in their product as they will be competing with many other projects online

The profit that has been generated in previous years and not distributed to owners is reinvested back into the business

This is a cheap source of finance, as it does not involve borrowing and associated interest and arrangement fees

The opportunity cost of investing the money back into the business is that shareholders do not receive extra profit for their investment

Some specialist venture capital businesses or successful entrepreneurs can be approached to invest in higher-risk businesses 

A business rejected as high-risk by banks may be able to access large amounts finance

Venture capitalists often provide business advice

Most venture capitalists demand a stake in the business and expect to have a say in how the business is run