10.2 sources of finance - internal and external

Question 1

Internal Sources of Finance

Answer 1

• Business owner’s equity or capital
• Outcomes of business activity

Question 2

Internal: EQUITY

Answer 2

• Profits that are kept and not distributed

Question 3

External Sources of Finance

Answer 3

• Financial institutions
• Government
• Increased risk for businesses using debt funding

Question 4

Short Term Debt

Answer 4

• Repaid within 1-2 years
• Bank overdrafts
• Commercial bills
• Factoring

Question 5

Short Term Debt: BANK OVERDRAFT

Answer 5

• Allows the business to overdraw its account to an agreed limit and for a specified time, to help overcome a temporary cash shortfall
• Interest charged, usually variable, paid on daily outstanding balance

Question 6

Short Term Debt: COMMERCIAL BILLS

Answer 6

• Bill of exchange (Loans) issued by institutions other than bank
• $100,000+ for a period of 90-180 days
• Bill of exchange is document ordering payment of a certain amount of money at a fixed future date

Question 7

Short Term Debt: FACTORING

Answer 7

• Selling of accounts receivable for a discounted price to a factoring company
• Business will receive up to 90 per cent of the amount of receivables within 48 hours of submitting its invoices

Question 8

Long Term Debt: MORTGAGE

Answer 8

• A loan secured by the property of the borrower
• Used to finance property purchases such as new premises, a factory or office

Question 9

Long Term Debt: DEBENTURES

Answer 9

• Issued by a company for a fixed rate of interest and for a fixed time
• Not secured over a specific property but over the company’s assets

Question 10

Long Term Debt: UNSECURED NOTES

Answer 10

• Loan for a set period of time but is not backed by any collateral or assets
• Most risk to the investors

Question 11

Long Term Debt: LEASING

Answer 11

• Payment of money for the use of equipment that is owned by another party
• Allows use of equipment without large capital outlay for an agreed period of time

Question 12

Equity

Answer 12

• Finance raised by a company by issuing shares
• Ordinary shares
• Private equity

Question 13

Equity: ORDINARY SHARES

Answer 13

• Individuals who become part-owners of a publicly listed company and may receive payments called dividends

Value of share is determined by
- New issue
- Right issue
- Placements
- Share purchase plan

Question 14

Equity: PRIVATE EQUITY

Answer 14

• Money invested in a company not listed on ASX
• Raise capital to finance future expansion of the business