Raising Finance

Internal Finance

Owner’s Capital: Personal Savings The personal savings of the business owner invested into the business. This method is both risk-free and interest-free. However, its limitation lies in the amount the owner has saved. For instance, if an entrepreneur has saved $50,000 over the years, they can invest this amount into their startup without seeking external funding.

Retained Profit Earnings that the business retains for its own use instead of distributing as dividends to shareholders. This is a cost-effective financing method as it avoids involving external parties or incurring additional interests. For example, a company making a net profit of $100,000 might decide to reinvest $70,000 back into the business and distribute the remaining $30,000 as dividends.

Sale of Assets A method where businesses sell assets that have become redundant or can be leased. While this can be a quick way to generate substantial funds, the trade-off is that the business loses the benefits those assets provided. For instance, a company might sell a property they own and then lease it back. They gain immediate liquidity but will have ongoing lease payments.

Understanding the various methods of raising finance is crucial for businesses. It allows them to make informed decisions about how to fund operations, expansions, or other ventures, ensuring sustainability and growth.

External Finance

Sources of Finance

Family and Friends Securing funds from close acquaintances, often under more lenient terms compared to formal financial institutions. For instance, a budding entrepreneur might borrow $10,000 from a relative with a flexible repayment plan.

Banks Acquiring loans or overdrafts based on a robust business plan and collateral. For example, a small business might secure a $50,000 loan from a bank to expand its operations, backed by company assets.

Peer-to-Peer Funding An online platform-driven method where individuals lend directly to businesses, eliminating the need for banks. A local cafe might raise $5,000 through a P2P platform to renovate its interior.

Business Angels Affluent individuals investing in promising startups, usually in return for equity or convertible debt. A tech startup, for instance, might give up 10% equity in exchange for a $100,000 investment from an angel investor.

Crowdfunding Harnessing the power of the internet to raise small amounts from a vast audience. An innovative product might raise $200,000 from thousands of backers on a crowdfunding platform.

Other Businesses Collaborating with other firms through partnerships or joint ventures to secure necessary funds. Two companies might form a joint venture, pooling resources to enter a new market.

Methods of Finance

Loans Acquiring a set amount to be repaid with interest over a predetermined period. A manufacturing company might take out a loan to purchase new machinery.

Share Capital Raising funds by selling business shares. A corporation might issue new shares to finance a major project.

Venture Capital Securing investment from entities specializing in high-growth startups. A biotech firm with a groundbreaking discovery might attract venture capital investment.

Overdrafts Utilizing a facility that allows spending beyond the account balance, up to a set limit. A retailer might use an overdraft to manage cash flow during a slow sales month.

Leasing Using assets by renting them, rather than purchasing. A delivery company might lease trucks instead of buying them outright.

Trade Credit Purchasing services or goods with a commitment to pay later. A restaurant might order ingredients on trade credit, agreeing to pay the supplier in 30 days.

Grants Receiving non-repayable funds, typically from government bodies or foundations, for specific objectives. A green energy startup might receive a grant to research sustainable technologies.

External financing offers businesses a plethora of options to secure the funds they need. By understanding each method’s nuances, businesses can make informed decisions that align with their goals and operational needs.

Liability

Implications of Limited and Unlimited Liability

Limited Liability: Business owners are shielded from personal financial risk. Their liability is confined to their investment in the business, ensuring personal assets remain untouched. For instance, if a limited liability company goes bankrupt owing $500,000, the owner’s personal assets like their home or car are safe.

Unlimited Liability: Here, the stakes are higher. Business owners bear the full brunt of any financial losses. If a sole proprietorship faces a debt of $200,000, the owner might have to sell personal assets to settle it.

Finance Suitable for Limited and Unlimited Liability Businesses

Limited Liability Businesses: With the safety net of limited liability, these businesses often find it easier to attract external finance. Investors and lenders are more inclined to invest, knowing their risk is capped to their investment.

Unlimited Liability Businesses: Treading with caution, these businesses might lean more towards internal finance. The looming risk of personal financial loss makes them wary of accruing too much external debt.

Financial Planning

Significance of a Business Plan in Securing Finance

A robust business plan is the ticket to securing finance. It paints a clear picture of the business’s roadmap, detailing its goals, strategies, and financial projections. This clarity instills confidence in potential investors and lenders, assuring them of the business’s viability.

Deciphering a Simple Cash-Flow Forecast

A cash-flow forecast is the financial compass of a business. It charts the course of cash inflows and outflows over a set period, ensuring the business remains liquid. By analyzing potential changes in these variables, businesses can strategize and make informed decisions.

Utility and Constraints of a Cash-Flow Forecast

While invaluable, a cash-flow forecast isn’t infallible. It’s a guiding tool, helping businesses plan and manage their finances. However, it’s based on estimates and can’t account for unexpected events. For instance, a forecast might not predict a sudden market downturn or an unforeseen expense, underscoring the need for businesses to remain adaptable.

Financial planning and understanding liability are cornerstones of a successful business. They guide decision-making, ensure financial health, and shield business owners from potential pitfalls.