3.1 Sources of finance Flashcards
Internal sources of finance
- getting funds from within the organisations
three main: personal funds, sale of assets, retained profit
Retained profit
- internal
- refers to the money left after paying taxes to the government and dividends to shareholders
+ no interest - used to purchase assets
- emergencies
short+medium+long
Sale of assets
- internal
- when the business sell their unused assets
- improve liquidity problem
short term
Share capital
- external & equity finance
money raised through the issue of shares
long term
IPO
- initial public offering
- when a business converts its legal status to public limited company by selling shares on stock exchange for the first time
short term
Loan capital
- medium to long term
- obtained from commercial lenders such as banks
- interest can be fixed or variable
medium + long term
One example of loan capital
- mortgage
- thế chấp
- secured loan for the purchase of property
- if the borrower fails to repay then the lender can have the property
External sources of finance
- finance obtained from out of the business
examples: equity finance, debt finance, financial aid, and other sources of finance
Overdrafts
- allows a business to take more money out of its bank account than it originally have
- commonly used in minor cash flow problems
short term
Trade credit
a company will obtain goods and services from a supplier immediately, but pay for them at a later date
Grants
- amount of money given by the government
short+medium+long
Subsidies
- similar to grants, however the government do it mainly for extended benefits for society
short+medium+long
Debt factoring
- a financial service that specialises in the collection of debts
seen as last option - ruins relationships
Leasing
- a form of hiring whereby a contract is agreed between a leasing company (the lessor) and the customer (the lessee)
short+medium+long term
Capital expenditure
spending on a firm’s fixed assets
fixed asset is something a firm plans to keep for longer than a year
examples: purchases of lands, building and machines
Revenue expenditure
day-to-day running costs of a firm
the cost a firm has to pay on a daily, weekly, or monthly basis
examples: paying suppliers, wages
Personal funds
money invested by the owner of a company
Business angels and venture capitalists
experienced investors looking for a fast-growing companies –> potentially make them a profitable return
Differences between venture capitalists and business angels
business angels - private individuals who risk their money
venture capitalists - companies that use the money from their clients to fund investment
Subsidies
designed to increase production of goods that are deemed beneficial to society
usually provided by governments
Grants
similar to loan, but no interest
Short-term finance
those are repaid with 12 months
normally used to solve cash flow problems or to pay for revenue expenditure
Long-term finance
used for longer than five years
all forms of equity finance are considered in this category
