Possible ways of raising finance

Share capital

this is money given to the business in return for shares in the company. This allows the shareholders some ownership of the business or company and allows them to have a share of the profits

Benefits

• limited liability encourages possible investors to invest in the business
• not necessary to pay shareholders a divident if the business cannot afford it
• more shareholders means that there is more expertise
• increasing the share capital can make it easier to borrow from the bank, as the share capital can purchase more assets which can be used as collateral from the bank
• share capital does not need to be repaid so therefore there is less pressure

Disadvantages

• in profitable years, shareholders may expect dividents, this is more likely to be more expensive than an interest charged on a loan
• the original aims of the business maybe lost as new shareholders may not have the same values as the original owners
• as more shares are sold to raise finance, the original owners may lose control

Loan capital

Loan capital is payment made by a bank or an organisation in return for the borrowers agreement that an interest will be paid during the period of the loan within an agreed time. For example a bank loan is the sum of money provided to a firm or an individual for a specific purpose that is agreed upon

pros

• interest rates are fixed in advance, which therefore makes it easier to budget
• interest rates are normally because of the security provided
• the size of the loan and the period of repayment can be arranged  to meet the exact needs of the firm

cons

• the size of the loan may be limited by the value of the collateral provided rather by the amount of money needed by the business
• it is often difficult or costly to repay the loan early
• start ups are often charged higher rates of interest because they are unable to provide guarantees that the bank manager might like

Bank overdraft

This is where the banka allows the person to overspend its current account up to an agreed limit, for  a specific period of time

Pros

• extremely flexible so can be used for temporary cash flow problems
• interest is only paid on the amount of the overdraft being used
• useful for seasonal businesses
• security is not usually required

cons

• interest rate charged is usually higher than a bank loan
• banks can demand immediate repayment

venture capital

venture capital is finance provided to small or medium sized firms that seek growth, but may be considered risky by other share buyers or lenders

pros

• available to firms who cannot get finance from other sources because of the risks involved
• they sometimes allow interest or dividents to be delayed
• venture capitalist may provide advice and guidance

cons

• they may want a significant share of the business
• may want high interest payments or dividents
• they may exert to much influence, so the original owner may lose their confidence

Personal sources

These can also be used and is money owned by the owner or borrowed from friends. Benefits of them can include that no interest has to be paid and it enables the owner to maintain control over the business. However it can mean that there is an opportunity cost as the owner can lose their savings. And they may even not have enough to finance the start up.

Others

You could take out a mortgage which would allow you to raise some more money, the interest charged on these is usually quite low however if the business is unsuccessful then the owner may lose their property. Selling private assets  would allow you to raise some extra cash but it might not be such a large amount.

What type of finance you use will depend on your situation, for example

long term finance

• personal sources
• ordinary share capital
• loan capital/bank loan
• venture capital

medium term finance

• personal sources
• loan capital/bank loan
• venture capital

short term finance

• personal sources
• short term bank loan
• bank overdraft

The type of finance that is chosen will also depend on your situation, the following factors will be taken into consideration…..

• Legal structure of the business: PLC’s and LTD‘s will sell shares and partnerships and sole traders may rely on personal finance or some form of bank loan
• use of finance: the length of time that it takes the business to earn the money to repay the loan should match the length of time the business is given to repay the money
• amount required: more than one source maybe needed
• level of risk: venture capital maybe the best option if there is a high level of risk
• views of the owners:  Owners maybe reluctant to lose control of the business, so may not go for the share capital.