Sources and methods of finance

What have you learned?

In preparation for this week you were asked to do some reading about ‘Sources and Methods of Finance’.

By the end of this week you should be able to:

• Describe different sources and methods of finance available to businesses

• Differentiate between ‘sources’ and ‘methods’ of finance

• Analyse different sources and methods of finance• Determine the most appropriate sources of finance

for a business• Evaluate the use of ‘Crowdfunding’

Key terms – how many do you know?

Trade credit

Loans

Business Angels

Overdraft

Leasing

How confident are you that you can define these key terms?

Red?Amber?Green?

Apply your learning

For each of the following scenarios you need to determine the best source and method of finance.You will be expected to justify your responses. There may be more than one method that is suitable in each scenario – extra kudos to those of you who identify more than one suitable method for a scenario.

Remember to look back at the criteria that businesses need to use when choosing the most appropriate finance method (clue: refer to your theory notes).

Scenario 1

Amos and Stephanie are both 24 and they have decided to start up a business cleaning people’s homes.

They do not need a great deal of capital as they both have cars already that they are willing to use to drive to clients’ houses.

They will need to be able to pay for some advertising to generate business and have some other start up costs, such as the need to buy some equipment.

They estimate that they will need £2000 to get started.

Scenario 2

JuicyJuice Ltd was established 5 years ago and began by selling organic juice drinks to small independent cafes and delicatessens.

They have gained a cult following and are considering expanding to supply their drinks to an upmarket supermarket chain that operates across the UK.

This project will require an investment in new premises, machinery and vehicles and it is estimated that the firm will require £350,000 in order to pursue this venture.

Scenario 3

Bace is a convenience store that serves the population of a small town in the north of England where unemployment levels are high. Throughout the recession the store has struggled and the firm’s profits have been falling steadily. In order to survive the firm has had to dip into their retained profits many times to pay wages and stock bills. Now that the recession is over, things are beginning to pick up and the firm’s owners Jay and Asia are feeling more confident.

They are keen to give the store a little facelift and to extend the product lines they offer. They also need some new freezers. They do not have any retained profits left but they are hopeful that this investment in their store will improve their profitability and cash flow in the very near future.

Exam technique

Look back through your responses to the scenarios. Have you:

• Described the sources or methods of finance using the appropriate terminology? (Kn)

• Linked your response directly to the context of the scenarios using data where possible? (Ap)

• Considered the effects of your proposed course of action? (An)

• Balanced your responses by assessing the benefits and drawbacks of your proposed course of action supported by relevant data? (D Ass)

KnApAnDAss

For next lesson

In readiness for next lesson you need to find out more about ‘Crowdfunding’

The links below will take you to some videos and notes on Crowdfunding. Make your own notes so that you are confident that you understand what it is and what its benefits and drawbacks are.

Crowd funding videos:http://www.bbc.co.uk/news/uk-28138286  http://www.bbc.co.uk/news/business-24802558  Crowd funding notes:https://www.moneyandco.com/news/1983/bbc%3A-9m-crowdfunding-ventures-explained

Lesson 2

Using the ‘Fundable’ link to draw up a profile of at least 2businesses that have been funded using crowdfunding. Outline what the business proposition was and the funding that was required.What attracted contributors to make their pledges?What are the future plans for the firm?In your opinion, would this business have got off the ground without crowdfunding? Why (not)?

https://www.fundable.com/browse/funded

Be prepared to feedback to the class.

Preparation for next lesson

Read up on the different forms of business organisation. You do not need to remember all of the features of the different structures but you DO need to understand the difference between limited and unlimited liability and the implications of this for business owners.

The document you need is a pdf file called ‘Forms of business’ in the 2.1 folder.