2. Capital
• When starting and setting up a new business, it is vital that the
owner is able to secure the capital (also referred to as finance
or money) required to fund the business. This capital is often
used to pay for premises, equipment, machinery and
advertising. Once set up, a business will need further finance to
operate on a day-to-day basis.
• As the business grows and expands, there is the possibility that
some customers will not pay their debts immediately, leading to
a short fall in available cash. The business will therefore need
short term capital to pay staff wages, to settle debts and to
purchase stock to sell.
3. Sources of capital
• Personal savings
• Friends and family
• Loans
• Crowdfunding
• Small business grants
• Business angels
4. Personal savings
• Personal savings is money that the owner has invested into
their business. It is usually long-term finance and will come from
their savings. There is no cost for this type of finance, other
than the loss of interest that could have been earned if the
money had remained in a bank account. If the business fails,
the owner will not get their savings back.
• The benefit of this method of finance is that is does not have to
be repaid and no interest will be due. However, there may be a
limit to the amount of money that the owner can invest.
5. Friends and family
• Friends and family are often willing to lend owners money to
start up their business. As with personal savings. This type of
capital is often tent without any charges or fees and is often
only repaid once the business has become successful. If the
business fails. Friends and families will not get their money
back, so this type of lending is high risk.
6. Loans
• Loans are usually a longer term source of finance and are offered by
banks. The lender will ask to see evidence you can repay the
amount in full. Loans are usually repaid over a period of three to ten
years.
• In return for lending the money, the lender will charge interest. This
will need to be repaid along with the amount of money borrowed.
Sometimes security might be asked for in case the business can not
re-pay the loan.
• One advantage of a loan is that set repayments spread the cost of
the loan over a period of time which lets the business budget for
them. The disadvantages of a loan are that high interest payments
can make it expensive and lender may require security.
7. Crowdfunding
• This is a fast-growing and relatively new method of finance for new
businesses. Instead of one person investing in a business idea and taking
ownership of a large part of the business. crowdfunding asks a group or
'crowd' of investors for funding.
• For example, if a new business required £100 000, instead of one person
investing that sum there could be 100 investors all willing to invest £l000.
This shares the risk of investment should the business fail.
• The benefit of crowdfunding is that there is a higher probability of raising
the funds than asking one Individual for the money. A drawback is the
business owner may have to give a proportion of their business to the
investors. A further drawback is that If the crowdfunding target is not
reached. any money already pledged by investors is usually returned.
meaning the business will receive nothing.
8. Small business grant
• Business start-up grants may be available from banks. Various
charities or the government. There are usually set criteria that need
to be met in order to access the grants. For example. some grants
are available only for those under 25 or they may be offered in areas
of the country where there are high levels of unemployment.
• When applying for a small business grant, the business owner will
need to have a clear business plan and a model of how their
business will operate and progress in the future.
• One important advantage of a small business grant is that it does not
have to be repaid. However. strict conditions are likely to apply and
not every business will be eligible.
9. Business Angel
• A business angel is a wealthy entrepreneur who provides a business
owner with a substantial sum of money to help them set up their
business. In return, the owner agrees to give the business angel a
proportion of the business's profits. The business angel is therefore
taking a considerable personal risk by investing in the new business.
However, if the business is successful. the business angel will
receive a sizeable return on their investment.
• Business angels provide a business owner with a large of amount of
money to invest in their business and they may also offer advice and
support in running the business. However, the business owner will
usually have to give a proportion of their business to the business
angel. The television programme, Dragons' Den. features small
business owners pitching their ideas to business angels known as
'Dragons', in the hope they will invest in their business.
