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3.1 Sources of Finance

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by

Mario Alvarado M.

on 12 July 2013

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Transcript of 3.1 Sources of Finance

Sources of Finance
Internal Finance
External Finance
Summary of Business Ownership and Sources of Finance
The Need for Business Finance
Short-term, Medium-term and Long-term Finance
Short-term:
the current tax (or fiscal) year. Anything has to be repaid to creditors and lenders within the next 12 months.
Capital Expenditure
It is the finance spent on purchasing fixed assets.
The sources of finance for CE tend to come from medium and long-term resources.
Revenue Expenditure
Refers to payments for the daily running of a business: wages, raw materials, electricity; and indirect costs: rent, insurance, advertising.
Personal Funds
Family and Friends
Working Capital
Retained Profits
Selling Assets
Sole traders
Partners
Sole traders
Partnerships
Money that is available for the day to day running of a business.
AKA internal profits or ploughed-back profits.
Value of profits that the business keeps hold of to use within the business.
Selling dormant assets
In extreme cases, selling some of their fixed assets.
Loan Capital
Overdrafts
Trade Credit
Government Grants
Share Capital
Main source of finance for a limited company.
Two types of share capital:
Preference shares
Ordinary shares
Loans obtained from commercial lenders such as banks.
Tend to be medium to long-term sources of finance.
Ex.: Mortgage
To take out more money than the business has from their bank account.
Commonly used for minor cash flow problems.
Buy now, pay later.
Creditors usually allow between 30-60 days for their customers.
They are usually offered to eligible businesses as one-off payments.
Government Subsidies
The focus is to benefit society.
Increased demand with cut in price.
Donations
Financial gifts from individuals or organizations to a business.
Charities, schools, hospitals and universities.
Sponsorships
When an organization gives financial support, in the form of cash, products or services, for another business in return for prominently displaying the sponsor's company brand or logo.
Debt Factoring
A financial arrangement in which a factoring company takes responsibility for collecting money relating to a business's invoices, and immediately pays that business part of the total amount owed on the invoices.
Leasing
Lessor - Lessee
The lessee pays rental income to hire assets from the lessor, who is the legal owner of the assets.
Hire Purchase
A business can pay for items in installments, perhaps over 12 or 24 months. Once all the payments have been made, then the item belongs to the business.
Debentures
Long-term loans
Used for a medium- to long-term debt instrument by large companies to borrow money.
In some countries the term is used interchangeably with bond, loan stock or note.
Debenture holders have no rights to vote in the company's general meetings of shareholders
The interest paid to them is a charge against profit in the company's financial statements.
Venture Capital
Is financial capital provided to early-stage, high-potential, high risk, growth start-up companies.
ROI
Business Plan
People
Track record
Business Angels
Some private investors that are extremely wealthy and choose to invest in businesses that offer high growth potential.
Highly experienced entrepreneurs that are likely to take a proactive role in the setting up or running of the venture.
Medium-term:
The time period of more than 12 months but less than 5 years.
Long-term:
Any time period after the next 5 years.
Full transcript