Sources Of Finance

Internal
1. Owner's Investment
  1. Money from the owners own savings / financial resources.
    1. Adv: Doesn't have to be repaid; No interest
    2. Disadv: Limit to the amount an owner can invest
  2. Start-Up or Additional Capital
  3. Long Term
2. Retained Profits
  1. When profits are ploughed back into the business
    1. Adv: Doesn't have to be repaid; No interest
    2. Disadv: Not available to new businesses; may not make enough to plough back
  2. Only available if the business has been trading for more than 1 year
  3. Medium or long term
3. Sale of Stock
  1. Money comes in from selling off unsold stock
    1. Eg. January Sales
    2. Adv: Quick way of raising finance; Reduces costs associated with holding stock
    3. Disadv: Must take reduced price for stock
  2. Short Term
4. Sale of Fixed Assets
  1. Medium Term
  2. Do not always have fixed assets which need to be sold
  3. Limit to number of fixed assets a firm can sell off
  4. Selling of, e.g, machinery which is no longer needed
    1. Adv: Raise finance from an asset which is no longer needed
    2. Disadv: Unlikely to have surplus assets; Can be a slow method
5. Debt Collection
  1. A trade receivable (debtor) is someone who owes the business money
    1. Not all businesses have, ie. those who deal only in cash
  2. A business can raise finance by collecting the money owed to them (debts) from their trade receivables
    1. Adv: Not additional cost in getting finance- part of normal operations
    2. Disadv: Risk that debts owed can go bad and not be repaid
  3. Short Term
External
1. Bank Loan
  1. Medium or Long Term
  2. Money borrowed at an agreed rate of interest over a set period of time
    1. Adv: Set repayments are spread over a period of time --> good for budgeting
    2. Disadv: Can be expensive due to interest; Bank may require security on loan
2. Bank Overdraft
  1. Where the business is allowed to be overdrawn on its account up to an agreed limit
    1. Adv: Good way to cover the period between money going out of and coming into a business; If used short term it is cheaper than a bank loan
    2. Disadv: Interest payable on amount overdrawn; can be expensive if used over a longer period of time
  2. Short Term
  3. They can still write cheques, even if they do not have enough money in the account
3. Additional Partners
  1. New partner(s) can contribute extra capital
    1. Adv: Doesn't have to be repaid; No interest
    2. Disadv: Diluting control of the partnership; Profit will be split more ways
  2. Partnership
4. Share Issue
  1. Involves issuing more share
    1. Adv: Doesn't have to be repaid; No interest
    2. Disadv: Profits will be paid out as dividends to more shareholders; ownership of the company could change hands
  2. Long Term
  3. Limited Company
5. Leasing
  1. Medium Term
  2. Involves making set repayments
  3. Allows a business to obtain assets without the need to pay a large lump sum up front
    1. Adv: Businesses can have the use of up to date equipment immediately; Payments are spread over a period of time --> good for budgeting; The finance company will pay for maintenance of the asset
    2. Disadv: Can be expensive; the asset belongs to the finance company
  4. Arranged through a finance company
  5. Like renting an asset, ie. you never own it
6. Hire Purchase
  1. Allows a business to obtain assets without the need to pay a large lump sum up front
    1. Adv: Businesses can have the use of up to date equipment immediately; Payments are spread over a period of time --> good for budgeting; Once all repayments are made the business will own the asset
    2. Disadv: Expensive method compared to buying with cash
  2. Involves paying an initial deposit and regular payments for a set period of time
  3. The main difference between hire purchase and leasing is that with hire purchase after all repayments have been made the business owns the asset
  4. Medium Term
7. Mortgage
  1. A loan secured on property
    1. Adv: Business has the use of the property; Payments are spread over a period of time --> good for budgeting; Once all repayments are made the business will own the asset
    2. Disadv: Expensive method compared to buying with cash; If business does not keep up with repayments the property could be repossessed
  2. Long term
  3. The business will own the property once the final payment has been made
  4. Repaid in insalments over a period of typically 25 years
8. Trade Credit
  1. 'Buy now, pay later'
    1. Adv: Businesses can sell the goods first and pay for them later; Good for cash flow; No interest charged if paid within agreed time
    2. Disadv: Discount given for cash payment would be lost; Businesses need to carefully manage their cash flow to ensure they will have money available when the debt is due to be paid
  2. Short Term
  3. Typical tradde credit period is 30 days
9. Government Grants
  1. Government organisations such as Invest NI offer grants to businesses, both established and new
    1. Adv: Don't have to be repaid
    2. Disadv: Certain conditions may apply, eg. location; Not all businesses eligible for a grant
  2. Usually certain conditions apply, such as where the business has to be located
Factors Affecting Choice
1. Purpose: What the finance is to be used for
2. Time Period: How long the finance will be needed for
3. Amount: How much money the business needs
4. Ownership and Size of the business

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