gcse economics - money - how businesses raise money

WHY DO THEY NEED MONEY?

• To start up
• To buy equipment
• To expand into new premises
• To take-over other companies
• Due to an unexpected crisis

SOURCES OF FINANCE

1. OWNERS SAVINGS

GOOD: Doesn’t need to be repaid
Doesn’t give ownership of the business to anybody else

BAD: Risk losing their own money
May not have enough savings

2. BANK LOAN

GOOD: Can raise a lot of money
Can receive the money quite quickly

BAD: Needs to be repaid
Will have to pay interest as well

3. MORTGAGE (long-term loan - e.g. 25 years)

GOOD: Can raise even more money
Have 25 years to repay

BAD: Will have to repay far more than the initial loan
A long term commitment

4. SELLING SHARES

GOOD: Can raise lots of money
Doesn’t necessarily have to be repaid

BAD: Shareholders becoming part owners of the business
Shareholders will expect annual dividends

5. PROFIT RETAINED IN THE BUSINESS

GOOD: Maintain control of the business.
Doesn’t have to be repaid

BAD: Must be making a regular and healthy profit

ACTION

What source of finance would you recommend to

a. A sole trader setting up her first business
b. A well established business that has been making large profits in recent years
c. A business that needs a large injection of cash but wishes to maintain control.
d. A business that wants to borrow £100,000 but also needs 25 years to repay
e. A large ltd company which wishes to grow and isn’t concerned about losing control

SMART THINKING

a. Why do some businesses not want to become plc’s?

These GCSE Economics revision notes have been kindly provided by Peter Davies of Mill Hill School, Ripley

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gcse economics - money - how businesses raise money

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