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Internal and External Sources of Finance

HSC - Finance

Christopher Sassine

on 5 April 2018

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Transcript of Internal and External Sources of Finance

Internal (equity) - Retained Profits
Retained Profits
Internal (Equity) -Owner's Equity
Owner's Equity
Five Main Influences on Financial Management
1. Internal Sources of Finance
2. External Sources of Finance
3. Global Market Influences
4. Influences of Government
5. Financial Institutes

External (Debt) - Short Term
Bank Overdraft
External (Debt) - Short Term
Commercial Bills
External (Debt) - Short Term
Influences on Financial Management
Internal and External Sources of Finance
External (Debt) - Long Term
External (Debt) - Long Term
External (Debt) - Long Term
External (Debt) - Long Term
External (Equity)
Ordinary Shares
External (Equity)
Private Equity
Unsecured Notes
The funds provided by the owners to establish and build the business.

Owners include:
> Partners; and
> Shareholders.

Advantages Disadvantages
> Easy to obtain if you > Difficult to obtain large
have the savings funding
> Interest Free > No tax benefits
> No loss of ownership
> Does not need to be repaid
(unless the owner leaves)
Net profit that is reinvested into the business. Also known as undistributed profits or retained earnings.

Advantages Disadvantages
> Cheap source of finance > Dependent on profit
(no interest costs) levels
> Accessible source of finance > No tax benefits
> No loss of ownership
An agreement between the bank and the business that allows the business to overdraw their account up to an agreed limit and for a specified time, to help overcome a temporary cash shortfall.

Advantages Disadvantages
> Assists with liquidity/ > High interest rate
cash flow problems > Interest is charged for each
> Can be arranged at short day the account is overdrawn
notice > Account fees
> Convenient
> Easy to make repayments
(funds are deposited back into
the account)
> Tax deductions on interest
Business Credit Cards -

- Convenient
- Loyalty programs
- Interest Free Days
Loans offered by companies (or merchant banks) rather than everyday retail banks. Companies who have a profit surplus will offer commercial bills.

> Short Term (90 - 180 days)
> Large amounts - over $100,000

Advantages: Disadvantages:
> Large funds available > Must repay loan
> Usually a lower interest rate back within a
> Can rollover loan period short period
The selling of accounts receivables for a
discounted price to a factoring company.
Advantages: Disadvantages:
> Immediate cash flow > Fees
> Save costs on chasing > Factoring with
payments recourse bears
risk for the firm
> Other forms of
debt (i.e creditcard)
may be cheaper
A loan secured by the property of the borrower (business)

Advantages: Disadvantages:
> Long period of time > Loss of ownership
to pay back loan (25-30years) of the secured asset
>Property acts as security(do > Can not use asset
not require other assets before to secure any other
hand) loans
> Interest only loans available
> Interest repayments are tax
Established companies can obtain finance by issuing a debenture. This is an invite for other companies to loan funds to the established company. The other companies (often Finance companies) benefit from receiving interest repayments.

Advantages: Disadvantages:
> Fixed interest rate - profit > Debenture does not impact on interest rate holder
> Fixed period of time has claim over
> Property not required as other assets
an asset
> Long term finance
A loan for a set period of time not backed by
any secured assets

Advantages: Disadvantages:
> Do not require > High interest
assets rate
Involves the payment of money for the use of equipment that is owned by another.

Advantages: Disadvantages:
> No large capital outlay > Lease fee may be
required higher than other
> Maintenance usually included forms of debt
> Fixed repayments, easy to budget
> Lease repayments are tax deductible
> No loss of ownership, as with equity
> Do not require other assets. The leased equipment becomes the asset
Operating Leases
Leased for short periods,
usually shorter than the life of the asset.
Advantages: Disadvantages:
> Can be cancelled > No ownership of
without fees assets.
> The leasing
firm carriers
out maintenance
Financial Leases (long term)
Leases for the life of the asset.

Advantages: Disadvantages:
> Transfer of > Can not
ownership of asset cancel to
to lessee at end of lease, end of
at a fair price. lease.
> Leasing company
responsible for
Releasing of shares to the general public.
New Issue:
Shares being sold for the first time.
Rights Issue:
The right for existing shareholders to purchase new shares first, usually at a discount too.
Shares offered directly to institutional investors.
Share purchase plan:
An offer to existing shareholders to purchase shares without brokerage fees or at a discount, no need to issue a prospectus.

Advantages: Disadvantages:
> Do not need to repay > Shareholders
the finance expect a dividend
> Loss of complete
decision making
> Loss of complete ownership
Offering shares of your company to private investors (not through the ASX).

Advantages: Disadvantages:
> Possibility to raise > Private investors
finance for niche demand a higher
products, that debt share of profit &
finance may deem as involvement.
too risky.
>Access to industry
knowledge depending
on who the investor is.
What is a Merchant Bank?

A bank that deals mostly in (but is not limited to) international finance, loans for companies and underwriting. Merchant banks do not provide regular banking services to the general public.

Their knowledge in international finances make merchant banks specialists in dealing with multinational corporations.
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