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Summary Edexcel A-Level Business - In depth Theme 2 notes
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This document contains 50 pages of in depth analysis and knowledge of all topics found in Theme 2 from the Edexcel Level course
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THEME 2:MANAGING
BUSINESS
ACTIVITIES
,EXTERNAL FINANCE:
- Few businesses can rely on internal financing to fund all business activity. Initially
external finance which is finance from source outside the business may not be
available. This is because business start-up has no trading record and present too
much risk for many lenders. Yet once a business has survived the initial uncertain
stages of business development, external sources of finance are likely to become a
realistic option.
SOURCES OF FINANCE:
There is quite a wide range of external sources that businesses can choose from:
Family and friends – common for small businesses. This is a cheap source because if the
money is a loan, interest charges may be low or possibly zero. Sometimes money can be
gifted to an entrepreneur. A possible advantage is that they may not want a stake in the
business, therefore no one will interfere. However serious problem could arise if a loan
isn’t paid off. Leading to broken relations
Banks – commercial banks like Barclays, NatWest provide a range of different external
funding arrangements for businesses. These includes loans, overdrafts and mortgages.
Most commercial banks have specialist department or staff that deal exclusively with
businesses. Banks will be involved in a business start-up because businesses need a bank
account to facilitate financial transaction with customers and suppliers. They can also
offer advisory services to businesses, which are free. Yet this involves a formal
application.
Peer to peer – involves people lending money to unrelate individuals or peers and
therefore avoiding the use of a bank. Although this source of finance can be used by a
business, it’s not exclusive to businesses. Key features of peer-to-peer lending include
the following:
- All loans are unsecured which means there is no protection of lenders. Therefore,
lender might lose their money if a borrower default
- The whole financial arrangements are conducted for profit
- All transaction take place online
- No previous knowledge or relationship between lenders and borrowers is needed
- Lenders may choose which borrower to lend to
- Peer to peer sites make a charge- typically about one per cent
Main attraction of p2p is that the interest rates are better for both borrowers and lender
than those offered by a bank. Very convenient because it can be completed online. Yet the
FSCS which guaranteed saving value of 85000 doesn’t cover participants.
Business angles – individuals who typically may invest £10000-100000+ for a stake in the
business. They might make one or two investments in a 3-year period either individually
or together with a small group of friends, relatives or business associates. Some like the
risk involved with being angel/others are attracted by tax relief by government. It is hard
however to find an angel can be hard. [basically, dragons den]
, Crowd funding – like p2pbut banks are excluded and individuals can lead money to
others without previous knowledge of them. Yet the fundraiser tends to be involved in a
particular venture such as staging a production.
MEHTHODS OF FINANCE:
Loans: arrangement where the amount borrowed must be repaid over a clearly stated
period in regular instalments. They tend to be rigid, and interest will be added to the total.
Bank loans – these can be unsecured loans. This means that lender has no protection if
the borrow for long term to repay the money owed. They can be used for long-term or
short-term purposes depending on the needs of business
Mortgages are secured loans where the borrower must provide some assets as collateral
to support the loan. This means that if the borrower defaults, the lender is entitled to
sell assets and use the proceeds to repay outstanding amount.
Debentures – specialised methods of loan finance. The holder of a debenture is a
creditor of a company, not an owner. Debenture holders are entitled to a fixed rate of
return but have in voting rights. Public limited companies use this for long term source
of finance
Share capital – for a limited company share capital is likely to be the most important
source of finance. Sales of shares can raise very large amounts of money. Issued share
capital is the money raised from sales of shares. Authorised share capital is the
maximum amount shareholders want a raise. Shared capital is often referred to as
permanent capital, due to is not normally redeemed. Once shares have been sold, they
buyer is entitled to a share in the profit. Shareholders can make a capital gun by selling
the share at a higher price than it was originally bought for. Shares are not normally sold
back to the business. The share of public limited companies is sold in special share
market called the stock market or stock exchange. Shares in private limited companies
are transferred privately.
Ordinary shares – these are called equities and are most common type of share issued.
This is the riskiest type of share since there is no guaranteed dividend. All ordinary
shareholders have voting rights
Preference shares- owners of shares receive a fixed rate of return when a dividend is
declared. They carry less risk because shareholder is entitled to their dividend before
the holder of ordinary shares. Some preference shares are cumulative, entitling the
holder to dividend arrears from years when dividend was not declared.
Deferred share – these are no used often they are usually held by the founders of the
company. Differed shareholders only receive a dividend after the ordinary shareholder
have been paid a minimum amount.
Venture capital – specialist in the provision of funds for small and medium-sized
businesses. Typically, they invest in businesses after the initial start-up and often prefer
technology companies with high growth potential. They prefer to take a stake in the
company, this means they have some control and are entitled to a share in the profit.
Bank overdraft – important source of finance for many businesses.
, Leasing – a lease is a contract in which a business acquires the use of resources such as
property, machinery or equipment, in return for regular payment. In this type of finance,
the ownership never passes to the business that is using the resource
Advantages to leasing:
- No large sums of money are needed to but the use of equipment
- Maintenance and repair cost are not the responsivity of the user
- Hire companies can offer the most up to date equipment
- Leasing is useful when equipment is only required occasionally
- Leasing agreement is generally easier for a new company to obtain to obtain than
other forms of loan finance. This is due to the assets remain the property of the
leasing company
- Over a long period of time leasing is more expensive than the outright purchase of
plant and machinery
- Loans cannot be secured on assts which are leased
Trade credit – common to buy raw material, components and fuel, and pay for them at a
leader date, usually within 30-90 days. By using trade credit it’s an interest free way of
raising finance. It can very profitable during inflation. Yet cost gods is often higher if the
firm does not pay early. Delayering the payment of bills can also result in poor business
relations with suppliers
Grants – both central and local government back a wide range of schemes. A list of
grants avaible can be accessed using the governments business finance support find
tool. Allowing firms to select specific funding options and search for grants by business
location, size and type of business activity. Usually available to small businesses. Most
grants do not have to be repaid, so this Is a significant advantage of this type of enternal
finance
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