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3.6.1 - Sources of finance GapFill
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When a/an spots a gap in the market and decides to start up their business, they will need money to finance this new venture. So they will need to look at different sources of finance and find the ones that are most appropriate for them. Then, once the business has started up, they will need additional finance to help the business grow and , e.g. to produce a new product.
One short-term method of financing a business is to apply for a/an from the bank. Although this is flexible and the business can use it on the days when they have a cash shortfall, it is also very expensive and the bank may refuse to grant the overdraft until the business is well established. The second short-term method is trade , and suppliers may offer the business 30, 60 or 90 days to pay their bills. This allows the business time to sell the goods before paying for them. However, in the first year of trading the supplier may refuse or charge a higher price for the credit arrangement.
For long-term methods of finance, a business has more choice of where to get the finance from. When starting up, the entrepreneur may put their own personal into the business. This is a good method of finance as there is no interest to be paid back to anyone, but then the owner cannot use the finances for anything else, which is an opportunity cost. Once the business has been up and running a year, they may have profits that they can use to grow the business.
For long-term finance, the business could also issue to fund expansion, or apply to the bank for a loan. Loans are fairly easy to organise, but the business will have to pay interest on any money that it borrows, which will increase the fixed costs. Another, less popular method of long-term finance is using a capitalist. They may lend if a bank won’t, but they will want some say in how the business is run, and the entrepreneur may not want to lose that control. A final method of long-term finance which is becoming more popular for start-ups is funding, which is the practice of funding a business or project by raising small amounts of money from a large number of people, typically via the Internet. The business makes a video appeal on a crowdfunding platform and showcases the product or service idea. This is ideal for a business which has been declined a bank loan, but the business runs the risk of not attracting investors.