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Chapter 31 - Finance For Growth - Edexcel GCSE Business

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Published in: Business | Business Strategy | Business Studies
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Revision summary of Chapter 31 - Finance for growth of the Edexcel GCSE Business syllabus.

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  1. FINANCE FOR GROWTH CHAPTER 31 'Ill
  2. Learning Objectives On completing this chapter, you will be able to: Understand the need for finance: shor-term, long-term, start up and expansion Understand internal sources of finance Understand external sources of finance
  3. THE NEED FOR FINANCE (businesses need finance in order to fund their...) SHORT-TERN NEEDS This is short-term finance (repaid within one year) needed to meet day-to-day running costs, such as: Wages Supply of raw materials Premises Utilitilies LONG-TERR NEEDS This is long-term finance or capital (repaid after one year or not) needed to purchase resources that'll be used repeatedly, such Machinery • Property Examples: Owners' own capital Financial institutions - banks
  4. START-UP CAPITAL These are the funds needed to first start a business • Typically one-off costs, such as a restaurant buying furniture, glassware and paying legal incorporation fees EXPANSION CAPITAL Once the business is established, these are the funds needed in order to expand. This expansion may take the form of: Producing more to meet higher demand Developing new products Branching into foreign markets
  5. HOW CAN BUSINESSES FINANCE THEIR GROWTH? the types of business growth INTERNALLY EXTERNALLY RETAINED EARNINGS Profit that is not returned to shareholders Pros: no interest; flexible Cons: some owners might object 1 SALE OF ASSETS Sale of redundant or unwanted assets • Could be selling assets off and leasing them back Pros: cheap & quick Cons: firms may not have assets to sell OWNERS' CAPITAL Most new businesses are funded by owners' own savings Pros: no interest Cons: may not suffice; it's a risk SHORT-TERN Repaid within one year. Examples include: Overdrafts • Trade payables Credit cards LONG TERR Repaid after one year or more Examples include: • Loans Share capital • Venture capital • Crowdfunding
  6. OVERDRAFT That is an agreement with a bank where a business spends more money than it has in its account, up to an agreed limit advantages simple to apply for flexible to get the money disadvantages very high interest rates bank has the right to call the money in at any time
  7. TRADE PAYABLES That is when businesses buy resources and pay for them later (usually within 30-90 days) Why is it a source of finance? Because it allows businesses to hold on to cash for longer advantages improves cashflow of the business can be used to finance short-term needs such as supplies of raw materials disadvantages many suppliers encourage early payment by offering discounts cost of goods may be higher if paid on credit - if an interest is charged many suppliers may not offer later payments at all
  8. CREDIT CARDS These allow businesses to borrow money immediately to be repaid later advantages convenient & flexible no interest if repaid within credit period disadvantages very high interest if repaid within credit period banks keep track of late payments and this may hurt the business' credit score
  9. LOAN CAPITAL (the different types) BANK LOANS These could be unsecured: when banks provide loans without the security of having a claim on your assets if you do not pay it back; or secured (the opposite). Rates are higher for unsecured loans. Can you think of the reason why? NORTGAGES A long-term & significant loan used to buy land or property, taken up to 25 years. If borrower fails to repay, the land/property is ceased as security. DEBENTURE A long-term security yielding a fixed interest rate, issued by a company and secured against assets HIRE PURCHASE Loans taken out for a specific purpose Features: business makes down payment • remaining fee paid in monthly instalments goods don't legally belong to buyer until last instalment goods can be repossessed • could be short-term or long-term
  10. SHARE CAPITAL Raising capital by selling shares to public investors (shareholders) Shareholders are paid dividends A rights issue - sale of new shares to existing shareholders at a discount - to raise more capital advantages easy to find investors firm is able to raise very large amounts of capital disadvantages shareholders may not be willing to buy more shares high administrative costs
  11. VENTURE CAPITAL Specialist investors (individuals or companies) who provide money for business purposes, often to new tech companies with great growth potential Their investment earns them a stake in the company - have some control and are entitled to profits Mainly raise funds through insurance companies, pension funds and wealthy individuals advantages Ability to raise large amounts of capital VCs have a lot of experience and important contacts disadvantages Difficult to find a suitable 'angel' Shared profits
  12. CROWD FUNDING When a large number of individuals invest in a business venture using an online platform as opposed to traditional methods advantages Peer-to-peer: Less bureaucratic, significantly cheaper Ability to raise capital from many different individuals disadvantages difficult to manage all investors may attract competition
  13. MULTIPLE-CHOICE QUESTIONS 1 Which Of these sources 2 of finance is internal? A Retained profit B Mortgage C Venture capital D Crowd funding Which Of these is a short-term source of finance? A B C D Mortgage Share capital Venture capital Bank overdraft Trade payables is a suitable source of finance to fund the purchase Of what? A A new delivery vehicle B Inventories C Property D Direct labour 4 A rights issue involves the sale Of what? A New shares on the stock market B Fixed assets C New shares to existing shareholders D Part Of the business
  14. CHAPTER QUESTIONS 1 What is meant by short-term finance? 2 Why is retained profit an internal source of finance? Blakely Motor Scooters often uses retained profit to fund business activity. 3 What is the main reason for using this method of financing? Blakely Motor Scooters uses trade payables to buy components and parts. 4 Discuss one advantage and one disadvantage of trade payables as a source of finance. 5 Assess whether Blakely Motor Scooters should fund the new factory through share capital or a mortgage. Make a clear judgement in your evaluation.

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