This document discusses various options for raising finance for a business, including personal savings, borrowing from friends and family, selling private assets, mortgages, overdrafts, bank loans, ordinary share capital, and venture capital. For each option, the advantages and disadvantages are outlined. Personal savings are cheap with low costs but risks losing the savings and may not provide enough funds. Borrowing from friends and family can offer easier repayment terms than banks but adds stress and potential disputes. Bank loans provide fixed interest rates and repayment periods but the loan size is limited by collateral provided. Venture capital may delay interest until the business is profitable but the business may lose significant control. Choosing financing options involves considering the business structure,

1. AS Unit 1:
Planning and
financing a business

2. 1.8 Raising finance

3. Personal savings
Personal savings
Advantages: cheap (no interest), low
Advantages: cheap (no interest), low
opportunity cost, able to keep control
opportunity cost, able to keep control
Disadvantages: risk of losing savings, may
Disadvantages: risk of losing savings, may
be insufficient
be insufficient
Personal sources (internal)
Borrowing from friends and family
Borrowing from friends and family
Advantages: may be more willing to lend than
Advantages: may be more willing to lend than
banks, easier repayment terms (interest
banks, easier repayment terms (interest
free?), sign of confidence for other lenders
free?), sign of confidence for other lenders
Disadvantages: adds to stress, potential
Disadvantages: adds to stress, potential
disputes
disputes

4. Selling private assets
Selling private assets
Advantages: can be leased back and still
Advantages: can be leased back and still
used, assets put to productive use
used, assets put to productive use
Disadvantages: creates family tensions,
Disadvantages: creates family tensions,
unlikely to raise large sums
unlikely to raise large sums
Personal sources (internal)
Mortgages
Mortgages
Advantages: lower rate of interest,
Advantages: lower rate of interest,
potentially raise sufficient sums
potentially raise sufficient sums
Disadvantages: may lose property if
Disadvantages: may lose property if
unsuccessful, high risk
unsuccessful, high risk

5. Overdraft
Overdraft
Advantages: flexible, can be used on temporary
Advantages: flexible, can be used on temporary
basis for cash flow problems, interest only payable
basis for cash flow problems, interest only payable
of amount of overdraft, security not usually
of amount of overdraft, security not usually
required
required
Disadvantages: higher interest rate than loan,
Disadvantages: higher interest rate than loan,
banks can demand immediate repayment, must
banks can demand immediate repayment, must
justify need
justify need
Share capital (external)
Bank loan
Bank loan
Advantages: interest rate and repayment period
Advantages: interest rate and repayment period
fixed, easy to budget repayments, low interest
fixed, easy to budget repayments, low interest
rates because of security, size of loan can be
rates because of security, size of loan can be
matched to needs of business
matched to needs of business
Disadvantages: size of loan limited by collateral,
Disadvantages: size of loan limited by collateral,
less flexibility, more expensive than personal
less flexibility, more expensive than personal
finance
finance

6. Ordinary share capital
Ordinary share capital
Advantages: limited liability attracts shareholders
Advantages: limited liability attracts shareholders
to invest, can choose whether to pay dividends and
to invest, can choose whether to pay dividends and
how much, makes it easier to borrow additional
how much, makes it easier to borrow additional
funds from banks, permanent
funds from banks, permanent
Disadvantages: shareholders expect dividends, loss
Disadvantages: shareholders expect dividends, loss
of control if 51% of shares not retained by owner
of control if 51% of shares not retained by owner
Share capital (external)
Venture capital
Venture capital
Advantages: may bring advice and expertise, may
Advantages: may bring advice and expertise, may
delay interest or dividends until profitable, may
delay interest or dividends until profitable, may
provide finance for risky businesses
provide finance for risky businesses
Disadvantages: may lose significant stake it the
Disadvantages: may lose significant stake it the
business, may demand high interest or dividends in
business, may demand high interest or dividends in
return for risk, loss of independence
return for risk, loss of independence

7. Legal
Legal
structure
structure
of business
of business
Amount
Amount
required
required
Use of the
Use of the
finance:
finance:
match the period of need
match the period of need
to the length of the
to the length of the
source
source
Choosing finance: factors to
Future
consider
Future
Views of
Views of
profit levels
profit levels
owners
owners
Level of
Level of
risk
risk

8. Task 1
In your table groups plan answers to the specimen exam
questions on Just Juice
Write up your answers for homework

9. Task 2
In your table groups talk through the seven business on
the worksheet
Complete the table, explaining your choice of source of
finance in each case
Explain the potential benefits of becoming a Limited
company and obtaining share capital to the partners in
business 7
Imagine you are a business angel with £100,000 to invest.
Draw up a series of questions to ask before investing in
each business
Decide which business you would invest in. Justify your
choice

10. Task 3
In your table groups. plan answers to the case study
‘Frozen meals firm took years to hot up’
Write up your answers for homework