Long-term finance
Personal savings
Personal savings is money that has been saved up by an A calculated risk-taker who sets up a business in return for financial gain.. This source of finance does not cost the business, as there are no interest charges applied.
Venture capital
Venture capital is money invested by an individual or group that is willing to take the risk of funding a new business in exchange for an agreed share of the profits. The A venture capitalist is an individual who invests money in a start-up business in return for a share of the business and/or the profits. will want a The amount of money that is received in return for investing in a business. as well as input into how the business is run.
Share capital
The money raised when a business becomes a public limited company by offering shares in the business in return for capital. is money raised by A part owner of a private or public limited company. through the sale of A share of a company entitling its holder to dividends which vary in amount depending on whether the company has a good or bad year.. Buying shares gives the buyer part ownership of the business and therefore certain rights, such as the right to vote on changes to the business. This can slow down decision-making processes.
Advantages of share capital include:
- Share capital is a source ofPermanent capital is a source of finance that never has to be paid back. – Shareholders cannot have a refund on their shares. Instead, if they want to sell their shares, they must find someone else to sell them to.
- There are noA sum of money paid regularly by a company to its shareholders out of its profits.to be paid if the business has a poor year – Shareholders are not promised dividends every year, as dividends are only paid if the business has made sufficient money to pay all of its costs.
Disadvantages of share capital include:
- It dilutes control for theA business founder is an individual or group of individuals who create a business. – The more shares that are issued, the more shareholders there are who own part of the business. This results in the founders having less control. In order to have a majority stake in the business, the founders must hold more than 50 per cent of the shares.
- The business is vulnerable to takeover – As a business grows and sells more shares, it becomes vulnerable to the threat of a takeover. This is because the shares are sold publicly and if an individual or group buys enough shares, they can persuade other shareholders to vote for a new management team.
Bank loan
A bank loan is money lent to an individual or business that is paid off with interest over an agreed period of time. Usually this rate of interest is fixed. This means that the business knows in advance what the Cost of borrowing is the interest charged on a bank loan. will be and what monthly repayments will be required. This allows the business to plan ahead.
To get a bank loan, a business must apply to a bank. The bank then carries out A credit check is when a company looks at the financial information held on a business or an individual to determine whether they are creditworthy (eg suitable to lend money to) and reliable. to see the financial history and reliability of the applicant. The bank may require the business to secure its An item of property owned by a person or company. against the loan. This means that if the business is unable to repay the loan, the bank can demand the sale of the assets to raise money to pay back the loan. If a business does not have enough assets, a bank may require a A person who guarantees a loan or payment. If the person or business taking out the loan does not pay, the guarantor pays instead. to repay the loan if the business does not make its repayments on time.
Retained profit
When a business makes a profit, it can leave some or all of this money in the business and reinvest it in order to expand. This source of finance does not incur interest charges or require the payment of dividends, which can make it a desirable source of finance.
Crowdfunding
Crowdfunding involves a large number of people investing small amounts of money in a business, usually online. Commonly used crowdfunding websites include Crowdfunder, GoFundMe and Kickstarter.
Advantages of crowdfunding include:
- It acts as a form of market research. If people don’t invest, it means the business idea is not attractive or distinctive enough, indicating that the business is likely to fail.
- It provides opportunities for individuals to start up a business even if they don’t have access to other sources of funding.
Disadvantages of crowdfunding include:
- The business must be interesting. Crowdfunding is most successful when the business idea is appealing, interesting and innovative.
- It can be difficult to reach the funding target. Statistics from crowdfunding websites indicate that less than 33 per cent of businesses achieve their funding target.