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“There simon jackson from learn loads calm here this video is about sources of finance. Finance. It s aimed as a quick guide for a level business students in particular term sources of finance is used in exam. Questions in relation to the need to either start up a new business or finance.
The project for an existing business such as investing in new machinery or developing and producing a new product sources of finance. Nearly always means sources of capital before we go on a quick question is money the same thing as capital of a think. The short answer is no money is not the same thing as capital capital is money. But nobody talks about needing capital to buy a cup of coffee or a new pair of shoes.
So when you re thinking about sources of finance make sure you re clear about the difference between capital expenditure. And what s called revenue expenditure. Now let me explain in the business. When we talk about raising money for capital expenditure.
It involves big one off costs such as buildings or machinery assets that we will use over a long period of time. The word capital is used in this way. Revenue expenditure is short term finance for things like wages. The electricity bill or other kinds of day to day expenses.
The money needed for revenue expenditure is called working capital you re not going to purchase. A crane or new office furniture. Using working capital once business is up and running these sorts of day to day. Very frequent expenses come from the revenue generated by selling products by trading.
That s what s called revenue expenditure. If a business is having to find more capital every month to pay for wages or pay the electricity. Bill then it s got real problems. It needs cash to pay for these trading expenses.
Not capital. Now. Remember that difference between capital and working capital. Okay.
Just think about that so what are the sources of capital for long term sis well we got personal capital and retain profit ordinary share capital loan capital and venture capital sources of working capital on the other hand include personal capital yep. A bank overdraft short term loan or trade credit. I m going to use an example before going to just explain different sources of finance. This is leon and susie.
They re planning to set up an upmarket florist. Together they ll need to start their business. 500000. Pounds capital.
But they ve only got 400 thousand pounds of their own personal capital. 200. Thousand pounds each okay first of all personal capital and retain profits. What we mean by that personal capital is the capital that the entrepreneur brings in to start the.
Business leon and susie s 200000. Each it may come from savings inheritance. The sale of a property retain profits that s profits that s left over from earlier years. That have not been spent in some way one big advantage of using your own money to start a business is they ll cost you less than a bank loan.
There s no bank. But no sorry there s no bank interest to pay ordinary share capital using share capital means that your business is a limited company not a sole trader or a partnership. They can t use shares a limited company if you re unsure about what that means have a look at this learn loads video just follow this link here where the founders of a company put their own capital in to startup business. They give themselves shares in effect.
Share capital is what is called internal finance in this instance. So okay leon and suzy are putting in two hundred thousand pounds each that share capital. But it s still their money. Though on the other hand.
If the founders of a new business. Attract capital from other people by selling them shares. Then you d call that external capital. Outside capital.
External capital. Is being brought in to help finance. This business. The big advantage of using share capital compared to borrowing money of the bank is that shareholders are to a large extent locked into financing the business and they only get a slice of your profit.
If you have enough profit to pay them using bank loans on the other hand. Means that you have to make regular repayments with interest whether you re making a healthy profit or not you still got to pay the bank. No matter how well or badly your business is going disadvantage er of share capital. The drawback of having shareholders might be that they have a say in the running of the company.
If the majority of the shares are held by external investors they ll have a great deal of influence over many of the important things going on within the business. There s lots more i could say about share capital. But have a look at my ebook if you want to find out more venture capital are two particular kinds of shareholders are venture capital companies and business angels another kind of venture capital is what s called crowdfunding the advantage of venture capital is that venture capital companies and business angels when you get those kinds of people involved the entrepreneur can benefit from contact with investors who ve got experience and expertise from supporting lots of other businesses as well so they might you know not only they re providing finance. They might also be a helpful source of advice loan capital now bank loans provide a fixed sum of money for a fixed period of time repaid.
According to whatever loan agreement you ve drawn up a bank loan is not the same as a bank overdraft by the way. I explained bank overdrafts later on the advantage of loan capital is that if the business raises. The finance it needs from a bank loan. It can benefit from being able to retain all of the profits.
It s making once that loan has been repaid shareholders on the other hand will continue to expect a share of profits. A disadvantage of loan capital is that supposing the business doesn t perform as well as expected you know as i said earlier loan payments have to be made regardless now let s turn to summarizing different forms of revenue expenditure first of all an overdraft. This means that a bank enables an account holder to have a negative balance on their bank statements. That s what it boils down to okay you can spend more money than you ve actually got according to your your bank balance in other words expenditure is greater than the money available in the account.
A percentage interest rate is charged. However if you go into overdraft ad. The advantage of an overdraft is its flexibility. If there s some kind of you know unexpected problem and you ve got to spend money then having an overdraft facility.
Connects as a safety net just like it does with people in their ordinary lives if things are going well maybe you can avoid using your overdraft. Too much so not paying interest. It s a very flexible way of borrowing money a disadvantage of an overdraft is that banks or rather add that you know the bank that you ve got an overdraft from might suddenly decide to withdraw your overdraft facility. Because it feels the business is not going very well they re a bit worried about getting their their money back.
So they cancel that overdraft facility. This can mean for lots of businesses. Particularly small businesses that they ve got no working capital and they re forced to stop trading. They were relying on that overdraft to keep paying their bills to tide them over a difficult period no overdraft big problems short term bank loans um.
These can be seen as an alternative to an overdraft obviously we re just talking about borrowing the money for a shorter period of time rather than a longer period of time you re not normally going to take out a bank loan to buy you know some 200000 pieces of equipment you re not going to take out a bank loan for one month for that is going to be a long term bank loan. Short term banknotes for smaller amounts might be appropriate trade credit. Um. It might be possible to negotiate with suppliers to be allowed a longer credit period for example.
A supplier might agree to give you 60 days to pay your bill instead of the standard 30 days credit. If you manage things well you don t have to make payment for what you bought from that supplier and you re reselling until after the goods have been sold this means you need less working capital tied up in your business. So you ve got no extra money in one sense. But trade credit.
The clever use of trade credit is a way of reducing the need for working capital. I hope this helps this video is based on part of one of my ebooks click on the link just here to find out lots more detail about sources of finance and everything else you need for a level business courses if you found this video helpful please subscribe to the learn loads a youtube channel and have a look at my channel. There s lots more where this came from thanks a lot bye you ” ..
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Sources of finance explained. Covers capital expenditure and revenue expenditure.
finance, working, overdraft, capital, expenditure, revenue expenditure, loan, venture capital, trade credit, retained profit