Overdraft

1. Overdraft Description A flexible arrangement that allows a business to spend more money than it has in its bank account, as and when it needs the finance. The best time for a business to use an overdraft could be when its setting up or if the business is a seasonal business and it is running out of money during the time it isn’t earning money. Advantages Once it has been set up, the business can use its overdraft arrangement as many times as it wants without having to ask the bank’s permission every time. Disadvantages Overdrafts normally have high interest rates attached to them and the bank can ask it to be paid back in full at any time

2. Retained profits (established business) Description A form of internal finance as no outside banks or other lenders are involved. When a business makes a profit that it does not need to pay shareholders in dividends, it keeps it in the business. The best time for a business to use retained profit would be if they were a business looking to expand without having to borrow money. Advantages The benefits are that there is no interest and they do not have to be repaid. Also there is no loss of control to shareholders and new owners. Disadvantages The disadvantages are that many business may expand but will still not be very profitable and profits may be turned into finance. When profits are low, business growth will be slow so loans or share issues may be better options.

3. Bank Loan ADVANTAGES With a bank loan, the person can borrow large amounts. The money does not have to paid back all at once, but with flexible payments every month or week. You can get the money straight away (as long as you don’t have a poor history of not returning payments) DISADVANTAGES Interest has to be paid on top of the payments, which can prove expensive and more money has to be paid back to the bank than you borrowed originally. Must meet the repayment terms or the bank can take possessions to make up the money and you will go bankrupt. -This is a finance provided by the bank from small to large amounts that will be paid back over a set period. This finance would be appropriate if short of money and you need money for something big such as a house (mortgage) or car.

4. What is selling unwanted assets? (established) • Selling unwanted assets is to pay for expansion or to pay off debts. • This is another form of internal finance as it turns the business’s own property and assets into cash. The business has to make sure that has it does not need the assets- if it does, then it could arrange a sale and leaseback deal. • When is selling unwanted assets best to use? • Selling unwanted assets is best to use for a business that is already steady. • You wouldn’t need to sell unwanted assets if the business is just starting up.

5. Advantages and disadvantages of selling unwanted assets • Advantages: • No interest paid and the finance raised does not have to be repaid. • No loss of control of the business. • Disadvantages: • The assets is no longer owned. • The asset may still be needed by the business so there will be leasing costs.

6. Trade credit is when a business can get products from a supplier and pay for the products at the end of the month e.g. asda might buy some crisps from walkers and pay at the end of the month once they have the money Advantages When using trade credit the business does not have to pay interest Disadvantages When a business uses trade credit they can not have discounts while using it How to obtain it A business has to have a good reputation with money and loans otherwise they will not be trusted to use trade credit Trade credit

7. Grant Money given to a business by a government organisation or charity. • Advantages: • They don’t have to return money • Can get a lot of money • Can be used to grow businesses • Disadvantages • Many business do not qualify • Sometimes they aren’t big • Grants can be stopped Many forms have to be filled out to prove the business to eligible for the grant. Small businesses tend to usually apply for grants.

8. Loan Can be used to buy machinery or pay for increases in stock. Short term or long term. There are two types of loan. There is a bank loan, which is provided by the bank and paid back over a set time. Loans from friends and family are provided by friends or family where the rate and payment period are agreed with them. Bank Loan Advantage Large amounts can be borrowed but don’t have to be paid back all at once. Disadvantages Interest has to be paid increasing costs Repayment terms have to be met The bank will want to see cash flow forecast and business plan. Loans From Friends and Family Advantage Flexible about repayment and may not charge interest. Disadvantage Might not be able to lend very much. Friends and family will depend on one business owners trust but may also want to see plans and details of the business plan.

9. Share issue ADVANTAGES: • No interest needs to be paid after the initial cost for shares. • Never have to buy back shares • Shareholders will expect to get annual payments from profit • Shareholders can loss control of business and someone else could gain majority control of the business DISADVANTAGES: