Sources of Finance
Money, money, money! We'd all like a bit more of it. In an ideal world, we'd all be patient and save up for things before we buy them. But human nature is to want more more more and now now now!
So, how can we get hold of some money to buy things now!
So, how can we get hold of some money to buy things now!
Debit Cards
Debit Cards are linked directly with your bank account. They allow you to spend money from your bank without actually using coins and notes. They work using a 'chip and pin' method, which automatically checks that you have enough money in your bank to pay for the product. If you haven't got enough money in your bank, the transaction will be declined.
So, if I use my debit card to pay for something that costs £30 from Sainsbury's, my bank account will automatically be reduced by £30 and Sainsbury's bank account will automatically increase by £30. Clever eh?! I can also use it in the same way to buy things off the internet.
Debit Cards are linked directly with your bank account. They allow you to spend money from your bank without actually using coins and notes. They work using a 'chip and pin' method, which automatically checks that you have enough money in your bank to pay for the product. If you haven't got enough money in your bank, the transaction will be declined.
So, if I use my debit card to pay for something that costs £30 from Sainsbury's, my bank account will automatically be reduced by £30 and Sainsbury's bank account will automatically increase by £30. Clever eh?! I can also use it in the same way to buy things off the internet.
An overdraft lets me go into minus figures in my bank account. My bank will let me do this if I have agreed this with them in advance. They will charge me a small amount of interest for doing this, for each day that I'm overdrawn.
So, if I have no money in my bank until I get paid on Friday, I can still get some money out of my bank to spend, up to the overdraft amount that I have agreed with my bank. When I get paid, my wages will clear the 'minus' amount.
So, if I have no money in my bank until I get paid on Friday, I can still get some money out of my bank to spend, up to the overdraft amount that I have agreed with my bank. When I get paid, my wages will clear the 'minus' amount.
A Bank Loan is an amount that a bank agreed to lend to you and you pay them back in small bits over an agreed period of time. This is normally between one and five years. People get loans out for things like new cars or paying for holidays.
Banks make a lot of money from lending to people. If I borrowed £5,000 over 5 years, I would probably end up paying back about £7,000 in total.
Banks make a lot of money from lending to people. If I borrowed £5,000 over 5 years, I would probably end up paying back about £7,000 in total.
A mortgage is basically like a bank loan but it is used to buy property, like houses. The loan is paid back normally over 25 years.
Banks make millions from mortgages because of the amount of interest that you pay back. For example, if I borrowed £100,000 to buy a house, the total payments that I would make over the 25 years would be about £180,000!!
Banks make millions from mortgages because of the amount of interest that you pay back. For example, if I borrowed £100,000 to buy a house, the total payments that I would make over the 25 years would be about £180,000!!
Pay Day Loans are used by people who desperately need some money for a short period of time. It is the most expensive way of borrowing money. Pay Day lenders charge crazy amounts of interest.
For example, if I borrowed £400 for 30 days, I would have to pay back an extra £130!
For example, if I borrowed £400 for 30 days, I would have to pay back an extra £130!
A Credit Card works in a similar way to a Debit Card, but it is much more dangerous.
Credit cards are for people who want to spend money now that they don't have and then pay it back at a later date. Interest rates can be very high though and lots of people use them to buy things that they can't really afford.
You are given a credit limit and you can then spend up to your limit on the card. You only have to pay small amounts back each month, but interest soon mounts up and you can end up owing a lot more than you originally spent.
Credit cards are for people who want to spend money now that they don't have and then pay it back at a later date. Interest rates can be very high though and lots of people use them to buy things that they can't really afford.
You are given a credit limit and you can then spend up to your limit on the card. You only have to pay small amounts back each month, but interest soon mounts up and you can end up owing a lot more than you originally spent.
Leasing is a posh way of saying that you are lending something, for example a car. A lease company will lend you a car for a set period of time, say 3 years, and you make a monthly payment to the leasing company. The good news is that it works out cheaper than buying a brand new car. The bad news is that at the end of the period, you have to give the car back and you don't own anything, so some people say it's wasted money.
Hire Purchase is similar to Leasing in that you make monthly payments but you don't actually own the product while you are making the payments. The big difference is that with Hire Purchase, you make a payment at the end of the period to then own the product. Some people use Hire Purchase to finance the payment of a new car, but it does work out more expensive than just buying the car for cash at the start.
Sale and Leaseback is a dangerous way of raising money. You basically sell something valuable, like your factory but then lease/rent it back from the people who bought it.
Lower league football teams sometimes do this as a way of getting some money to pay off their debts and buy new players. They decide to sell their ground off to a major supermarket, but agree to lease it back for a period of time, say 10 years.
For the first 10 years, everybody is happy. The football club have money to spend and the supermarket have some land that is probably going to increase in value during the next 10 years. But at the end of the 10 year period, the supermarket might want to demolish the ground and build a new shop there. The football club would therefore be homeless! So, Sale and Leaseback is a way of getting money, but the business needs to have a long-term plan for what happens at the end of the lease period.
Lower league football teams sometimes do this as a way of getting some money to pay off their debts and buy new players. They decide to sell their ground off to a major supermarket, but agree to lease it back for a period of time, say 10 years.
For the first 10 years, everybody is happy. The football club have money to spend and the supermarket have some land that is probably going to increase in value during the next 10 years. But at the end of the 10 year period, the supermarket might want to demolish the ground and build a new shop there. The football club would therefore be homeless! So, Sale and Leaseback is a way of getting money, but the business needs to have a long-term plan for what happens at the end of the lease period.
A company can raise extra finance, or capital, by selling Shares in their business. LTDs (Private Limited Companies) could invite new people to buy shares, or they could ask existing shareholders to buy more shares.
A company could make lots of money by turning themselves into a PLC (Public Limited Company). This would mean that they receive lots of money from the general public in return for shares in their company. This is great, because it is money that the business will never have to pay back, so they can use it to expand their business and make even bigger profits in the future.
The downside, however, is that the original owners would no longer own the business. Instead, any future profits would have to be divided up among the shareholders. Remember, this is known as paying a 'dividend'.
A company could make lots of money by turning themselves into a PLC (Public Limited Company). This would mean that they receive lots of money from the general public in return for shares in their company. This is great, because it is money that the business will never have to pay back, so they can use it to expand their business and make even bigger profits in the future.
The downside, however, is that the original owners would no longer own the business. Instead, any future profits would have to be divided up among the shareholders. Remember, this is known as paying a 'dividend'.
Trade Credit is when a business is given time to pay for the things that they buy from their suppliers.
For example, say I owned a corner shop selling beans. I need to stock my shelves with beans, but I haven't got any money to buy any from the wholesalers.
The wholesalers might say to me "If we give you 100 tins of beans now, will you pay us for them in 30 days time?". Now, this sounds good to me because in 30 days time I will have sold all of the beans at a profit, so I'll be able to pay the wholesalers back.
The wholesaler lets me do this because they know that at the end of the 30 days, I'll probably go back to them for my next lot of beans, rather than going to a different wholesaler.
Trade Credit is an excellent way of helping the cash flow in your business.
For example, say I owned a corner shop selling beans. I need to stock my shelves with beans, but I haven't got any money to buy any from the wholesalers.
The wholesalers might say to me "If we give you 100 tins of beans now, will you pay us for them in 30 days time?". Now, this sounds good to me because in 30 days time I will have sold all of the beans at a profit, so I'll be able to pay the wholesalers back.
The wholesaler lets me do this because they know that at the end of the 30 days, I'll probably go back to them for my next lot of beans, rather than going to a different wholesaler.
Trade Credit is an excellent way of helping the cash flow in your business.