3.1 Sources of finance Flashcards
what is the role of finance for businesses?
capital expenditure
revenue expenditure
what factors would decide the suitable source of finance?
size of business
type of business
time scale
purpose of the finance
capital expenditure
investment spending on fixed assets such as the purchase of land and buildings
e.g. machinery, buildings, land, vehicles
revenue expenditure
spending on the day-to-day running of a business
e.g. rent, wages, utility bills
what are some internal sources of finance?
personal funds
retained profits
sale of assets
personal funds
main source of finance for sole traders and partnerships
retained profits
the profits that the business keeps after paying taxes and dividends - often used for purchasing and/or upgrading fixed assets
sale of assets
when the business sells their dormant assets such as old machinery or computer equipment to raise finance
what are some external sources of finance?
share capital loan capital overdrafts trade credit grants subsidies debt factoring leasing hire purchase
share capital
the money raised from selling shares in the company -
main source of finance for most limited liability companies
loan capital
medium- to long-term sources of finance obtained from commercial lenders such as banks
e.g. mortgages, bank loans, debentures
mortgage
a loan for the purchase of property such as land or buildings that is secured/has collateral
debenture + ads and disads
long term loan certificates issued by limited companies without collateral or security
ads: can be used to raise very long term finance, up to 25 years
disads: interest must be paid
overdraft + ads and disads
allows a business to temporarily overdraw on its bank account
ads: interest will be paid only on the amount overdrawn
ease/speed of arrangement
disads: interest rates are variable
trade credit + ads and disads
allows a business to ‘buy now and pay later’
ads: almost an interest free loan
disads: the supplier may refuse discounts
grants + ads and disads
refers to the government financial gifts to support business activities that do not need to be repaid
ads: does not need to be repaid
no interest rates
disads: often given with “strings attached”
subsidies + ads and disads
similar to grants but the focus is to provide benefits to society
ads: do not cut into profit margin
disads: although firms charge lower prices, profit is made up by the financial support of the government subsidy
debt factoring + ads and disads
a specialist agent buys the claims on debtors (people who owe the business money) giving the business immediate cash
ads: the collection of debt becomes the problem of the factor and not the business
disads: the firm does not receive 100% of the value of its debts
leasing + ads and disads
using an asset without purchasing it, just paying a monthly sum to use it
ads: suitable for businesses that do not have the initial capital to buy assets
spending on leased assets is classes as a business expense, thus tax is reduced
disads: for the long term, it is more expensive than hire purchase or purchase of the asset
hire purchase + ads and disads
buying a fixed asset immediately but paying for it over a period of time with interest
ads: the firm doesn’t need large sums of cash to purchase the asset
disads: high interest payments
short-term sources of finance
overdraft bank loan creditors debt factoring sale of assets
medium-term sources of finance
hire purchase
leasing
medium term loan
long-term sources of finance
share capital
debentures
long term loan
grants
venture capital
a form of high-risk capital invested by venture capital firms, usually at the start of a business idea. the finance is usually in the form of loans and/or shares in the business venture
what do venture capitalists look at before committing their capital in an investment project?
return on investment
the business plan
people
track record
business angels
wealthy entrepreneurs who risk their own money by investing in small to medium-sized businesses that have high growth potential
what factors do managers need to decide on before choosing their source(s) of finance?
[STAGE PC] size and status of firm timeframe amount required gearing external factors purpose of finance cost of finance
