Sources of Finance (Leaving Cert Business): Revision Notes

Sources of Finance

Introduction to financing start-ups

When starting a new business, securing adequate finance is absolutely crucial for success. Entrepreneurs need money not just to get their business off the ground, but also to keep it running smoothly. The initial costs can be substantial - you'll need funds for equipment, vehicles, premises, stock, wages, and various other operating expenses.

Smart financial planning means understanding that different types of expenses require different sources of funding. The key is matching the right type of finance to its intended purpose, whilst considering factors like cost and control.

Key factors when choosing finance

Before selecting any source of finance, businesses must evaluate several important factors:

Purpose and matching

The golden rule of business finance is that the term of the finance should match how long you'll use what you're buying. Long-lasting assets like buildings should be financed with long-term sources, whilst day-to-day running costs need short-term finance.

Cost considerations

Every source of finance comes with a price tag. Businesses should seek the most affordable option available by comparing annual percentage rates (APR) across different lenders and finance types. Even small differences in interest rates can significantly impact profitability over time.

Control implications

Some financing choices can affect who controls the business. For example, selling shares to raise equity capital might mean giving other people voting rights in your company. Bank loans don't affect ownership, but banks might require security against your assets.

Types of finance by term

Short-term finance (0-1 year)

These sources help cover immediate, everyday expenses:

• Bank overdraft: Allows you to withdraw more money than you have in your account
• Credit cards: Useful for smaller purchases and expenses
• Trade credit: Buying goods now but paying suppliers later

Typical uses: Wages, utilities, rent, and other regular operating costs

Medium-term finance (1-5 years)

Perfect for purchasing assets that will last several years:

• Medium-term loans: Bank loans repaid over 1-5 years
• Leasing: Renting equipment or vehicles with option to purchase
• Hire purchase: Buying assets through instalments

Typical uses: Vehicles, equipment, machinery, and other business assets

Long-term finance (over 5 years)

For major investments and permanent business assets:

• Share capital: Money raised by selling ownership stakes
• Equity capital: Investment from external shareholders
• Grants: Government or EU funding (doesn't need repaying)
• Long-term loans/debentures: Bank loans over extended periods

Typical uses: Buildings, premises, major equipment purchases

Comparing medium-term finance options

When purchasing business assets like vehicles, you'll typically choose between three medium-term options. Here's how they compare across the key factors:

Tax implications

• Medium-term loan: Interest payments are tax-deductible, making this option tax-efficient
• Leasing: Lease payments can often be offset against tax, providing tax advantages
• Hire purchase: Less tax-efficient than the other two options

Security requirements

• Medium-term loan: Banks usually require security or personal guarantees to protect their investment
• Leasing: No security needed as the leasing company owns the asset
• Hire purchase: No security required initially, but the lender can repossess if payments aren't made

Cash flow impact

• Medium-term loan: Repaid in regular instalments, preserving more cash for daily operations than buying outright
• Leasing: Rental payments spread over time, keeping more cash available for running the business
• Hire purchase: Instalment payments, but higher interest rates reduce overall profitability

Asset ownership

• Medium-term loan: You own the asset immediately, but it can be seized if loan isn't repaid
• Leasing: The leasing company owns the asset; you're essentially renting with possible replacement options
• Hire purchase: You gain ownership after the final payment, though the asset may lose value over time

Practical considerations

When choosing finance, consider this real-world context: according to recent research, €350 million was invested in Irish start-up companies in 2018, but 60% of this went to just nine enterprises. This shows that while substantial funding exists, competition for it is intense.

Each financing decision should align with your business's specific circumstances, cash flow projections, and growth plans. Remember that the cheapest option isn't always the best if it doesn't match your business needs or puts excessive strain on cash flow.