Following your conversation with the Barman last week, you have had a chance to think about possible business structures and to talk to one or two people running their own business. Every one of them has asked you how you intend to finance your business. They all work in the service sector but you are interested in manufacturing. The last person you spoke to is Bill, the lorry driver/owner.
Bill You need to figure out just how much capital you need. You know things like fixed assets, stock working capital and the like.
You Well how much did you need?
Bill Don’t think that will help you much. I own my own lorry, have an office in my home and the wife helps out with paperwork. If you want to make something, it’s a different ball game.
You Are you saying we will need a lot more than you did?
Bill I would have thought so. I was able to get a loan from the bank and overdraft facilities. I had to put my house on the line and put some cash of my own in as well.
You Well there are a few of us and we have some assets between us.
Bill That’s a start but whoever lends you money will want to see that you have committed yourselves by risking your own funds. My accountant says the amount they will lend compared to what you put up has got something to do with ‘gearing’. He also says when you raise money for things you need to think about ‘matching’.
You So should we go to the bank manager then?
Bill Well you can but for your type of business it’s not the only way of raising finance. Have you thought about selling shares, equity finance, venture capital. You might want to think about borrowing from family and friends but that can be a bit dodgy. Then there might be grants and tax breaks for new businesses.
You Sounds like we have a lot to learn.
Bill Yes and in a short time. One piece of advice I will give you for free. If you go for this when you do raise finance make sure you raise enough to get through the start up period. The last thing you need is good sales and a cash flow problem.
Following this PBL cycle you should be able to:
o Discuss the requirement for capital and explain the terms, fixed assets, stock and working capital giving illustrative examples.
o Explain why different types of business (eg service v manufacturing) have different requirements for capital.
o List possible sources of finance.
o Analyse the way that these differing finance methods work and draw conclusions about their advantages and disadvantages for your business idea.
o Explain the concept of ‘gearing’ and draw some conclusions about what sort of ‘gearing’ is likely to be required for your business.
o Discuss the concept of ‘matching’ in the context of raising money for business purposes.
o List the grants that are potentially available for the type of business operation you are proposing along with relevant conditions.
o Discuss any tax incentives that may be available for your proposed new business.
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