Skip to 0 minutes and 3 seconds We’ve seen that a business needs more capital to grow and generate more profits. Regardless of how you want to grow your business, you will need some form of financial support to finance that growth. That support could come from multiple potential sources. Jonathan Fairhurst, at Fit Flop, explains the most common ones. At the beginning, an amazing number of businesses are set up from the bank of mum and dad or the deep pockets of shareholders, who say, OK, I’m going to mortgage my house. And I’m going to take a loan against my house so that I can put money into the business, because I believe I can drive this forward and I can make a go of it. That’s not sustainable, absolutely.
Skip to 0 minutes and 47 seconds Unless you’re an Al-Fayed or someone else from a very wealthy background, you’re going to need external financing. And the external financing route– generally a two, threefold. You could look for new shareholders to go out to market and sell some of those shares in return for cash that can be put into the business. You could go to commercial banks. They have a lot of lending facilities that they make available, but they have restrictions against them. And you’ve got risks associated with that. You could find an angel investor. Or you could look at some of the crowd funding and crowd sourcing approaches that are available nowadays– again, that are unregulated, but have an availability and a push for the business.
Skip to 1 minute and 31 seconds There are three main areas of finance a business can use– investment, borrowing or debt, and crowd-funding. One way of increasing a business’s capital and funding growth is to persuade other people to invest in the business. For a small business, this might be family and friends. If the business is a company, this is achieved by issuing more shares. This is called equity investment. Let’s go back to the camera business we talked about before. We could offer 10 more friends 50 shares each at a price of 5 pounds each. This will give the business and extra 2,500 pounds and it can use this to buy more cameras. So we now have 21 cameras to sell.
Skip to 2 minutes and 19 seconds If we sell these at 800 pounds each, we are looking at a potential profit of 6,300 pounds. The shareholders are owners and are entitled to the profits made by the business. This means we will have to share the profits of the business with our friends. Another disadvantage is that ownership of the business is diluted, meaning the entrepreneur may lose autonomy. If the investor wants their investment back, they have to sell their shares to other people. For a company listed on the stock market, the price will be decided by the market rather than the company. If the business fails, shareholders run the risk of losing all of their investment.
Skip to 3 minutes and 4 seconds 1,000 pounds invested in Apple in 1980, when it offered shares to investors, would today be worth over 250,000 pounds. But Apple nearly went bankrupt in 1997. If they had gone under, investors would have lost their money.
Financing growth: investment
We have seen that businesses need capital to invest in assets that allow them to grow and generate more profits. But where can companies find the money to finance growth?
There are a number of common methods companies use pay for expansion. In this video we will begin by looking at investment.
As Alice explains, investment is where a business persuades people to invest money in the business, usually in return for a share of the business’s profits. We will also hear from entrepreneurs, business owners and financial partners as they tell us how they have grown their own businesses.
In the downloads section below there is a document you can review which provides more detail on how the camera business Alice introduced would need to keep its balance sheet up-to-date. In the next step we’ll then look at another common source of business finance, debt.
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