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Sources of Funds

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									Sources of Funds

-   for new businesses
-   Solving Cash Flow problems
-   by External methods!
Questions - Raising money
What sources of funds are
available to develop a new

There a several sources of
funding to consider when starting
a new business. Included in
these are the following:
Sources of Funds for
new businesses
 Personal Savings:     primary source of
 capital to start new businesses
 Friends and relatives:   no interest loans?
 Banks and Finance Companies:
     Most common source of funding,
      if business is sound and meets lending
 criteria. May require business plan.
 Personal Credit Cards:     a “last resort”
 <-- high interest rates
 Sources of Funds for new/
 expanding businesses

 Venture Capital firms:
 provide start-up and other needed money
  for new/expanding companies in exchange
  for equity or part ownership.
 these are usually for larger enterprises.
Sources of Funds or Capital
 In the real world,
 businesses can use a wide range of other
  sources of funds to help finance their
  trading activities.
 not all of them are in cash;
 some take the form of assets that the
  business can use.
 these can be used to improve cash flow in
  both the long and short term.
      Main Sources of Funds
 Below are the main sources of funds or
  capital, available to operating businesses to
  improve and manage their cash flow.
 Owner's Capital         Leasing
 Shareholders'           Hire Purchase
  Capital                 Buying on Credit
 Retained Profit         Selling Assets
 Overdraft               Debtors
 Bank Loan               Factoring
          Owner's Capital 1
 Often, the only source of capital available
  for the sole trader starting in business.
 same often applies with partnerships,
 but there are more people involved, so there
  should be more capital available.
 This type of capital, when invested is often
  quickly turned into long term, fixed assets,
  which cannot be readily converted into
  Owner's Capital 2: cash flow
 If there is a shortfall in Cash Flow, owners
  of operating business could invest more
  money in the business.
 For many small businesses, however, the
  owner may already have all their capital
  invested, or they may not be willing to risk
  further investment,
 So this may not be the most likely source of
  funding to deal with cash flow problems.
      Shareholders' Capital 1
 Shareholders are the owners of a Limited
 They invest money in the hope of capital
 That is, the business makes profits, grows,
  makes more profits
 As the business becomes bigger, their
  investment will be worth more, and
 their dividend (the shareholders share of the
  companies profits) will be worth more
      Shareholders' Capital 2
 It is quite normal for limited companies to
  issue new shares (a Rights Issue),
 in an attempt to raise capital,
 but this is normally for investment,
  expansion or restructuring,
 not for solving a cash flow problem!
     Shareholders' Capital 3:
        Retained Profit 1
 At the end of the trading year, a business
  will work out its profit.
 All of this profit can be taken by the
 This would be the dividend in a limited
 Alternatively, some or all of it could be
  reinvested in the company,
 to help the business grow and therefore
     Shareholders' Capital 3:
        Retained Profit 2
 Retained profit is shown as reserves on a
  Company Balance Sheet,
 but it can take the form of any business
 so it may not be in cash, or money in bank.
Shareholders' Capital 3: What
   is Operating Profit (1)?
 Profit is often a misunderstood term.
 Profit is the surplus in money terms that a
  firm has made after paying all the costs
  associated with producing and selling
  that product.
 It should not be confused with sales
  revenue which is the money the firm has
  received from selling the product.
 Shareholders' Capital 3: What
    is Operating Profit (2)?
 There are various types of profit measured by
  accountants in the firm's profit & loss
 Operating profit is the profit after both the direct
  and indirect costs have been paid.
 Sales revenue - Cost of goods sold = GROSS
 Gross Profit - marketing and admin. costs
 Operating profit is sometimes also known as
               Overdraft 1
 a form of loan from a bank.
 business becomes overdrawn when it
  withdraws more money out of a bank account
  than there is in it,
 this leaves a negative balance on the account.
 It is often a cheap way of borrowing money
 once an overdraft has been agreed with bank,
  business can use as much as it needs up to the
  agreed overdraft limit, at any time.
                Overdraft 2
 But bank will charge interest on the amount
  overdrawn, and
 will only allow an overdraft if they believe the
  business is credit-worthy
 i.e.: it is likely to pay the money back.
 bank can demand repayment of an overdraft at
  any time.
 Many businesses have been forced to cease
  trading because of the withdrawal of overdraft
  facilities by their bank.
               Overdraft 3
 Even so, for short term borrowing, an
  overdraft is often the ideal solution, and
 many businesses often have a rolling (on-
  going) overdraft agreement with the bank.
 This is often the ideal solution for
  overcoming short term cash flow problems,
 for example: funding the purchase of raw
  materials, whilst waiting for payment on
  goods produced (which may or not be sold)
               Bank Loan 1
 lending by a bank to a business.
 fixed amount is lent: e.g. £10,000
 for a fixed period of time: e.g. 3 years.
 bank will charge interest on this, and
 the interest plus part of the „capital‟ (i.e., the
  amount borrowed) will have to be paid back
  each month.
 bank will only lend if business is credit-
  worthy, and bank may require security.
                Bank Loan 2
 if security is required, this means the loan is
  secured against an asset of the borrower
 for example, house/business asset of Sole Trader
 if loan is not repaid, bank can take possession of
  asset/house and sell it to get its money back!
 loans normally made for capital investment
 unlikely to be used to solve short-term cash flow
 but, if loan obtained, frees up other capital held by
  the business, which can be used for other purposes
                 Leasing 1
 Leasing
 business has use of an asset,
 but pays a monthly fee for its use and will
  never own it
 For example, someone setting up business
  as a Parcel Delivery Service (courier).
 Could lease a van they need from a leasing
                 Leasing 2
 Will have to pay monthly leasing fee, say
  £250 per month
 This is very useful if they do not want to
  spend £8,000 on buying a van.
 Will free up capital which can be used for
  other purposes.
 Business purchasing equipment may decide
  to lease if it wishes to improve its
  immediate cash flow.
                Leasing 3
 In example above, if van had been
  purchased, flow of cash out of business
  would have been £8,000
 By leasing, flow out of business over first
  year would be £3,000,
 Possible £5,000 left for other assets and
  investment in the business.
 Leasing allows equipment to be updated
  regularly, but it costs more in the long run.
               Hire Purchase
 Similar to leasing,
 But, at end of hire period, asset belongs
      to the company/etc. that hires it.
 For example, farmer could Hire Purchase
  a tractor.
 Would own the tractor once they had paid
  for it
          Buying on Credit 1
 creates Creditors.
 If a business, selling shoes, buys on credit from
  Clark's Shoes/K-Shoes, it may not have to pay
  Clark's for one month after delivery of goods.
 It means business could sell the shoes at a
  profit, and have money at the end of the month
  to pay Clark's invoice.
 Extending the credit period will help short
  term cash flow. For example:
 by delaying paying invoices for extra 14 days
          Buying on Credit 2
 will be more cash in bank for this period.
 However, it may upset a business‟ suppliers,
 who have their own cash flows to think of!
 Next time the business wanted credit from
  supplier, they may be turned down!
 Slow payment by debtors is problem for many
  businesses, and
 the government has tried to take action against
  this type of behaviour.
               Selling Assets
 Business can sell its assets to raise capital!
 Often last choice: assets are vital to business.
 Business may lease-back asset so retain its use
 However, often preserve only of big business.
 For example, sale & leaseback of office blocks
 Selling and leasing back improves short term
  cash flow
 If cash raised used effectively, long term cash
  flow and profitability can also increase.
 If firm is in immediate need of cash, could
  chase its debtors for repayment.
 May result in „early repayment‟ discounts.
 Chasing debtors for early repayment may
  lead to long-term loss of trade.
 Debtors may buy from another business
  next time, but
 Can be an effective method of solving
  short-term cash flow problems.
               Factoring 1
 For larger firms with turnover (sales) of
  £100,000 or more per year,
 Is possible to let Factor manage the
 Factor is a type of finance company
 Will pay 80% of invoice value at time of sale,
 Will take responsibility for receiving
  payment from debtor(s).
 balance owed by debtor(s) will be passed on
                Factoring 2
 There is a charge for factoring
 Amount charged depends on such things as:
 Number of debtors,          Size of debts,
     Past bad debt history.
 But factoring improves business' cash flow.
 It is popular amongst small to medium size
 This proves many managers and owners
  regard this service as good value for money
                        Any Questions ?

Powerpoint presentation prepared by M C Pratt, St Martin‟s College, from:
Cash Flow Learning Trail: Sources of Funds or Capital by biz/ed & Frequently Asked Questions by SCORE Pittsbu

Web pages:        http://www.bized.ac.uk/stafsup/options/cashflow4d.htm

NOTE: Copyright of content in all slides is assumed to be retained by biz/ed and SCORE Pittsburgh,
The only exception to this is where amendments or improvements have been made in this presentation which are sufficient
for copyright of those amendments or improvements (only ) to then pass to M C Pratt.

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