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Unlock This CourseEvery business needs money to operate, whether it's a brand new start-up or an established company looking to grow. Understanding where this money comes from and why it's needed is crucial for business success. Finance is the lifeblood of any business - without it, even the best ideas can't become reality.
Key Definitions:
New businesses need money before they make any sales. This includes buying equipment, renting premises, paying staff and covering initial marketing costs. Without proper start-up finance, even brilliant business ideas fail to launch.
Businesses require finance for various reasons throughout their lifecycle. Understanding these needs helps entrepreneurs and managers make better financial decisions.
When starting a new business, entrepreneurs face numerous upfront costs before generating any revenue. These initial expenses are essential for getting the business operational.
Rent deposits, shop fittings, machinery, computers and furniture. A bakery needs ovens, mixers and display cases before selling a single cake.
Salaries, training and recruitment costs. Businesses must pay employees from day one, even before customers start buying.
Initial inventory, raw materials and supplies. A clothing shop needs stock on shelves before opening to customers.
Jamie wants to open a healthy juice bar. She needs £25,000 for equipment (£15,000), initial stock (£3,000), shop fitting (£5,000) and three months' rent (£2,000). Without this start-up finance, her business idea remains just a dream.
Successful businesses often need additional finance to grow. Expansion requires investment in new opportunities, markets, or capabilities.
Opening additional branches or moving to larger premises. McDonald's needs finance for each new restaurant location.
Research, development and launch costs for new product lines. Apple invests billions developing each new iPhone model.
Marketing campaigns, distribution networks and international expansion. Netflix spent heavily expanding into global markets.
Businesses can obtain finance from various sources, each with different characteristics, costs and requirements. These sources are typically categorised as internal or external.
Internal sources come from within the business itself. These are often the first choice for established businesses as they don't require external approval or create debt.
Money kept from previous years' profits instead of paying dividends to shareholders. This is the cheapest source of finance as there's no interest to pay. However, new businesses haven't made profits yet, so this isn't available for start-ups.
Selling equipment, property, or other assets the business owns. This provides immediate cash but reduces the business's resources. A restaurant might sell its delivery van if it decides to use external delivery services instead.
External sources come from outside the business. These are essential for start-ups and businesses needing large amounts of capital.
Fixed amount borrowed with regular repayments plus interest. Suitable for specific purchases like equipment. Banks require business plans and often security.
Flexible borrowing up to an agreed limit. Good for short-term cash flow problems. Interest only paid on amount used, but rates are usually high.
Owner's own money invested in the business. Shows commitment to lenders and investors. Risk is that personal wealth is at stake if business fails.
Sarah's tech start-up needs £50,000. She uses £20,000 personal savings, gets a £20,000 bank loan and receives £10,000 from a business angel investor. This mix reduces risk and provides different benefits - personal control, structured repayment and business expertise.
Some external sources involve selling shares in the business rather than borrowing money. This brings in finance without creating debt.
Wealthy individuals who invest their own money in start-ups. They often provide expertise and contacts alongside finance. Dragons' Den shows this type of investment in action.
Professional investment firms that fund high-growth businesses. They typically invest larger amounts than business angels but want significant control and returns.
Choosing the right finance source depends on the business's situation, needs and circumstances. Each option has distinct advantages and disadvantages.
When selecting finance sources, businesses must evaluate several key factors that affect their decision.
Interest rates, fees and charges vary significantly. Overdrafts might seem convenient but often have high interest rates compared to loans.
Short-term needs suit overdrafts or trade credit. Long-term investments need loans or share capital that don't require quick repayment.
Loans maintain owner control but create debt. Selling shares brings in finance without debt but reduces owner control over decisions.
Mike's landscaping business needs £30,000 for new equipment. A bank loan at 6% annual interest means predictable monthly payments and keeping full control. Alternatively, selling 30% shares to an investor provides the money without debt but means sharing future profits and decisions.
Different business needs require different types of finance. Smart businesses match their finance source to their specific requirements.
Cash flow gaps, seasonal variations, or temporary stock increases suit overdrafts, trade credit, or short-term loans. These provide flexibility for temporary requirements.
Equipment purchases, premises, or major expansion suit long-term loans, mortgages, or share capital. These spread costs over many years and match the asset's useful life.
Successful businesses carefully plan their finance needs and choose appropriate sources. This involves understanding their current position, future plans and available options.
Good financial planning helps businesses avoid cash flow problems and ensures they have money when needed.
Predicting when money comes in and goes out helps identify when additional finance is needed and for how long.
Detailed plans showing how finance will be used and repaid. Essential for convincing lenders and investors to provide money.
Understanding what could go wrong helps choose appropriate finance sources and amounts. Conservative businesses prefer loans over giving away shares.
Started with £500,000 from business angels who bought 20% of the company. Later needed millions for expansion, so sold more shares to Coca-Cola. This progression from angel investment to corporate investment is common for successful growth businesses.