Page 4: External sources of finance
Banks are a major source of finance for all businesses, providing finance for starting up, running the business and for expansion:
- loans can be short-term, medium-term or long-term, depending on need.
- mortgages are long-term loans for the purpose of buying fixed assets such as buildings and equipment.
- overdraftsare short-term loans with limited duration which can help the day-to-day running of the business.
All financing has specific terms and conditions, for example, times for repayment and interest charges. Interest is the fee the bank takes for providing the loan. The rate of interest varies between each type of loan and according to how much risk the bank feels there is.
There is no single best source of finance and not all sources are available to all businesses. It is important to assess the advantages and disadvantages of each in the context of the business' size, needs and intended return on investment and choose the most appropriate option. Every investment is a risk and successful investors balance the degree of risk against potential rewards.
Duncan has used most sources of finance at different times:
- When setting up Duncan's Super Ices, he used personal savings of £450 to cover the main cost for the van itself.
- For setting up the bedsits, his main source was re-invested profits from the ice cream vans.
- He took on a bank loan and a re-mortgage on his own home to buy the land for the first nursing home. The building costs of the nursing home were to be financed by a 70% mortgage. However,the bank would only release the money once the home was finished and full.
In order to build the home:
- Duncan used profits from the ice cream business, as well as selling his car, TV and stereo
- he re-mortgaged the Scarborough residential home and took out several credit cards to cover ongoing costs
- as a last resort, he sold Duncan's Super Ices for £28,000 to finish the nursing home.
The total set-up costs were £360,000. However, the bank valued the finished care home at £600,000. The 70% mortgage was therefore worth £420,000. This meant Duncan recovered all costs and had equity to fund the next project.
By buying larger plots of land for health club sites, Duncan has also been able to diversify his business by building Bannatyne Hotels next to health clubs. These save on costs by sharing staffing, reception and breakfast facilities whilst offering customers something different, the use of the health club when staying at the hotel. Duncan has also been able to sell spare land to finance new projects. This illustrates the importance of using fully any assets the business has.