External
finance
This is money
that is source from out side the firm, this type of finance sourcing can come
in various forms, short term, middle term, and long term finance.
- Bank loan-
A loan is a type of debt. this
type of loan is an agreement made between the firm and the bank where the
same agreed amount is paid back every month this is a fixed loan and could
be short term or long term depending on the amount and the agreement. The
only variance to the original amount would be the interest paid to the
bank. Interest is the cost of borrowing money in most cases interest is
usually there, unless money is borrowed from family or friends. This
interest is paid every month and the interest may vary every month
slightly, depending on the national interest rates which are set by the
bank of
· Overdraft-
An overdraft
occurs when withdrawals from a bank account exceed the available balance which
gives the account a negative balance - a person can be said to have gone "overdrawn". If there is a prior
agreement with the account provider for an overdraft protection plan, and the
amount overdrawn is within this authorised overdraft, then interest is normally
charged at the agreed rate. If the balance exceeds the agreed terms, then fees
may be charged and higher interest rate might apply. the main
difference between an over draft and a normal bank loan is that the mount of
money paid back every month is decided by the borrower, there Is no agreement
on the amount of money paid back and interest is only charged on the amount
outstanding. This type of loan usually charges a higher rate of interest on
average.
Sourced: (http://en.wikipedia.org/wiki/Overdraft
)
There are
negative and positive aspects to borrowing money from the bank. Different banks
over different interest rates and these rates are constantly changing. Since
interest is the cost of borrowing finance. As a business you would want to be
paying as little interest as possible so you would want to have a low rate. You
may borrow money form Nat west for example and they may be offering 8.4%
interest on your borrowed money but this could change and you could end up
paying higher interests form another bank. These rates are unpredictable.
This also applies
to mortgages. The slight change in interest rates could lead to very high
amounts of money being paid in excess for no reason.
Nat West
In
comparison to Abbey (now Santander):
(*note: displayed images are consistent with current bank loans)
It is easy to deduce from the above images that borrowing money from abbey would be positive for the business as the business would not be paying as much interest in comparison to NatWest.
· Debentures- is defined as a certificate of acceptance
of loans which is given under the company's stamp and it carries an undertaking
that the debenture holder will get a fixed return (fixed on the basis of
interest rates) and the principal amount whenever the debenture matures. In
finance, a debenture is a
long-term debt instrument used by governments and large companies to obtain
funds. A debenture is usually unsecured in the sense that there are no liens or
pledges on specific assets. It is, however, secured by all properties not
otherwise pledged. In the case of bankruptcy debenture holders are considered
general creditors. The advantage of debentures to the issuer is they leave
specific assets burden free, and thereby leave them open for subsequent
financing. Debentures are generally freely transferable by the debenture
holder. Simply put a debenture is very similar to a bank loan the major difference
is that the money is not being borrowed from the bank but is being lent out
from a privet lender, who would have agreed on a fixed date in which they
receive all the money at once including the fixed interest rate lump sum. Sourced: (http://en.wikipedia.org/wiki/Debentures
) a debenture is always a loan from a private investor or business, interest is
always payable but must be paid all at once as a fixed amount. The debenture is
always paid back as a lump sum at the end of the set period.
- Venture capital- Venture capital is a type of private equity capital typically
provided by professional, outside investors to new, growth businesses.
Venture capital investments are generally made as cash in exchange for
shares in the invested company. A venture
capitalist (VC) is a person who makes such investments. Simply put
a venture capitalist is a successful business person who injects money
into a new and promising business idea or business to help it succeed.
Venture capitalists look at their investment in the firm as a long gain.
- Government
grants- depending on the nature of
the business they firm could be issued a government grant. These grants
are either financial injections of finance. They could come in various
forms. The government could pay for some of the firm’s bills or could be
given start up capital. Government
grants would usually be given because the firm is directly involved with:
- Training
and development
- Environmental
greenness
- Real estate
development
- Infrastructural development
- International
enterprise
Usually this grant is
given to firms that would benefit the community in anyway. Grants are funds given to tax-exempt nonprofit organizations or
local governments by foundations, corporations, governments, small business and
individuals. Most grants are made to fund a specific project and require some
level of reporting. The process involves an applicant submitting a proposal to
a potential funder, either on the applicant's own initiative or in response to
a Request for Proposals from the funder. Other grants can be given to
individuals, such as victims of natural disasters or individuals who seek to
open a small business.
Other methods of sourcing capital
- own capital: most small business that are aiming or
starting very small and growing over time (organically growing), start off
by having their owners putting in the money that helps the firm start that
is either the money sourced from the owners’ savings or a random injection
of cash to boost the firms liquidity. This is most common in sole traders
and partnerships where you would see the owner making a lot of
contribution form their own money pools. This is mainly because these two
types of firms leave the owners with the most liability for the firm where
as large companies and conglomerates have their firms registered giving
their firms a separate identity form their owners leaving their owners not
liable for mayhems of the firm
- Friends and family: a good way to get a loan which dose not have
to be paid back with interest would be from family and friends. If you
have an agreement between family and or friends it is very possible to
gather a considerable amount of capital from them without having to pay
any interest on top of the money lent, but this is all down to the
agreement that is made.
Recommendation
I recommend that
the business takes out a mortgage and a loan
for its start up capital the mortgage
should cover the property cost as well as the interior and furniture of the gallery.
Business finance
The business idea should be developed economically but effectively. The
business would need finance to pay for resources, for example:
- The equipment
used to print the logos or to pay the firm’s creditors the firms that would be making the printouts.
- The premises in which the firm will store the
products, sell the shirts form operate all its business in. this will be
the rent of the premises or the actual cost of the businesses building.
- Raw materials such as the wool need to produce
the shirt or the money needed to buy the already made shirts from other
firms that specialise in producing these shirts ready for printing.
- Labour and other resources such as the cost of
operation and the costs of maintaining the premises. There should be money
set aside to pride for bad debts as well as depreciation of fixed assets.
There should always be pools of finance or money available any kind of
unforeseen liability in which the business may encounter especially since
the firm is a new firm.
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