3.1: Sources of Finance Flashcards
The need for finance can be categorized as? (two)
Capital Expenditure and Revenue Expenditure
Capital Expenditure
Spending on fixed assets and capital equipment of a business.
Examples of Capital Expenditure.
Buildings, equipment, tools and vehicles
Revenue Expenditure
Financing daily and routine operations.
Examples of Revenue Expenditure
Raw materials, utility bills and paying employees.
Internal Sources of Finance (3)
Come from within the business using its own resources; personal funds, retained profit and sale of assets
Personal Funds
(Sole traders) use their own personal funds from their savings to fund the start-up
Retained Profit
the surplus funds reinvested in the business; belong to the owners (instead of being distributed to shareholds- dividends).
Sale of Assets
Selling fixed assets to raise finance
External Finance (13)
Comes from outside of the organization
Short Term Finance (5)
Up to one year. Solve cash flow problems, pay revenue expenditure. (Expensive). Overdrafts, Trade Credit, Debt Factoring, Leasing, Subsidies.
Overdrafts
Financial service, withdraw more money than exists in its bank account. Interest high. Allow business to have emergency access to finance during liquidity problems.
Trade Credit
Enables a business to obtain goods from a supplier without having to pay immediately. One-two months.
Examples of Trade Credit. (1) Credit Card
Provides interest-free credit if the outstanding balance (amount owed) is paid on time.
Examples of Trade Credit. (2) Hire Purchase (medium)
Pay fixed assets (e.g. vehicles) in regular instalments over a predetermined period. The finance company (lender) retains ownership of the FA until the business pays the final instalment.
Debt Factoring
Business (bank) that takes over the debtors of a business. The debt factoring service provider charge around 20% of the value of debtors as their fee. (selling of claims over debtors to a debt factor in exchange for immediate liquidity)
Leasing (can be medium)
The business only leases a fixed asset and is responsible to maintain it. The leasing contract usually makes the business pay a monthly fee for a fixed period of time.
Difference between Leasing and Hire Purchase
HP: ownership of the asset is transferred to the business after its final paid. Leasing: ownership is not transferred at all.
Subsidies
Encourages output. Government helps the investment that would be too expensive.
Difference between grants and subsidies
Grants: awared for a specific purpose/project and help finance entirely.
Subsidies help partially pay to encourage output. (Same goals)
Medium Term Finance
Up to five years. Used to finance capital expenditure or purchase fixed asset. Bank loan or Loan Capital.
Long Term Finance (6)
More than five years. Used to fund growth and expansion. (Share Capital, Venture Capital, Loan Capital, Business Angels, Grants, Mortgage, Debentures)
Loan Capital
Borrowing funds from a financier (lender; bank). Charges interest, can be paid installments or at the end.