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3.1 Sources Of
Finance
- The Need for Business Finance
- CAPITAL EXPENDITURE:
the finance spent on
purchasing fixed
assets (e.g. land,
buildings,
equipment,
machinery, etc.).
- REVENUE EXPENDITURE:
refers to the payments for
the daily running of a
business (e.g. wages, raw
materials, electricity, etc.)
- CAPITAL EXPENDITURE:
the finance spent on
purchasing fixed
assets (e.g. land,
buildings,
equipment,
machinery, etc.).
- Internal Finance
- PERSONAL FUNDS:
the main source of
finance for a sole
trader and for
partners going into
business together
(e.g. Jaime Oliver,
p.337)
- FAMILY & FRIENDS
Borrowing from
family and friends
- Often reasonably
straightforward and
inexpensive
compared to
borrowing from
banks (require
collateral before
authorizing a loan).
- Usually very limited
and often provoke
arguments and
fallouts.
- Often reasonably
straightforward and
inexpensive
compared to
borrowing from
banks (require
collateral before
authorizing a loan).
- WORKING CAPITAL:
refers to the money
that is available for
the day to day
running of a
business.
- comes from
sales of goods
and services
- vital source of finance
- comes from
sales of goods
and services
- RETAINED/INTERNAL/PLOUGHED-BACK PROFITS:
value of profits that the business keeps hold of
(after paying taxes to the government and
dividends to its share holders) to use within the
business.
- business does not have to rely as
much on borrowing (which incurs
interest charge)
- 1. may not be sufficient for a firm to conduct its business (other sources of finance are needed)
2. keeping more of the profit for business means less of it is available for distributing to
shareholders
- business does not have to rely as
much on borrowing (which incurs
interest charge)
- SALE OF ASSETS:
selling machinery that
has been replaced or
off out-of-season
stock at discount
(dormant assets)
- INVESTING EXTRA CASH
- PERSONAL FUNDS:
the main source of
finance for a sole
trader and for
partners going into
business together
(e.g. Jaime Oliver,
p.337)
- External Finance
- SHARE CAPITAL:
money that has been
raised from selling
shares in the company
- Preference Shares:
preference shareholders
earn a fixed dividend from
a company's profits and
paid before other
shareholders
- safe income stream +
low risk investment in
comparison to ordinary
shares
- preference
shareholders do not
benefit to the same
extent as ordinary
shareholders during
highly profitable periods
- safe income stream +
low risk investment in
comparison to ordinary
shares
- Ordinary Shares/Equity Capital:
dividend is unknown beforehand,
based on the level of profits
made by the company
- Preference Shares:
preference shareholders
earn a fixed dividend from
a company's profits and
paid before other
shareholders
- LOAN CAPITAL:
loans that are
obtained from
commercial
lenders such as
banks
- Mortgage:
secured loan for
the purchase of
property
- Business Development Loan:
catered to meet the specific
development needs of the
borrower
- Mortgage:
secured loan for
the purchase of
property
- OVERDRAFTS: allows
a business to
temporarily
overdraw on its
account
- TRADE CREDIT:
allows a business to
"buy now and pay
later"
- GOVERNMENT GRANTS:
government offering
financial aid to support
business activities
- GOVERNMENT SUBSIDIES:
to reduce the costs of
production, focus is to
provide benefits to society
- DONATIONS &
SPONSORSHIPS
- DEBT FACTORING:
financial service that
allows business to
raise funds based on
the value owed by
their debtors
- option of non-recourse factoring
for the provision of bad debts.
- high fees charged by the
financial institutions that
offer debt factoring services
- option of
non-recourse
factoring
- high fees charged by
the financial
institutions that offer
debt factoring services
- option of non-recourse factoring
for the provision of bad debts.
- LEASING: form of hiring
whereby a contract is
drawn between a leasing
company (lessor) and the
customer (lessee).
- lessee pays rental income to
hire assets from the lessor
- lessee pays rental income to
hire assets from the lessor
- HIRE PURCHASE (HP): business
can pay for items in instalments
- DEBENTURES: debenture do not
usually have ownership or voting
rights in how the business should
work (long-term loans)
- VENTURE CAPITALS:
loans or shares
invested by venture
capital firms or
individuals (high risk
capital)
- Return on investment
- The business plan
- People
- Track record
- Return on investment
- BUSINESS ANGELS:
wealthy investors that
choose to invest in
businesses that offer
high growth potential
(high risk + high
return).
- SHARE CAPITAL:
money that has been
raised from selling
shares in the company
- Short-term, Medium-term
and Long-term Finance
- SHORT-TERM:
refers to the
current tax year +
anything that has to
be repaid to
creditors and
lenders within 12
months
- MEDIUM-TERM:
refers to time
period of more than
12 months less than
five years
- LONG-TERM:
refers to any
period after five
years (the longer
the harder it
becomes to plan
efficiently).
- SHORT-TERM:
refers to the
current tax year +
anything that has to
be repaid to
creditors and
lenders within 12
months
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