3.2 sources of finance Flashcards
internal source of finance
Money for a business that is raised from the business’s or owner’s existing assets. using money that was already previously owned.
3 main internal sources of finance
personal funds
retained profits
sale of assets
personal funds
refer to money invested by the owner or owners of a business.
This investment comes with a risk for the owner: if the business goes bankrupt, the money will be lost.
recessions
A period when GDP decreases for two or more successive quarters (three-month periods).
retained profit
Money that a company has left at the end of the trading year after paying all costs, expenses, dividends and taxes.
It is the primary source of finance for all businesses.
disadvantage of retained profit
that it may take many years before the funds are in place. Another disadvantage associated with using retained profits is the loss of dividends
advantage of retained profit
hey do not have to be repaid
why is retained profit contriversial?
Some people see these cash reserves as an indication that the companies are not distributing value among stakeholders. Others would like to see the money used to develop the business further.
sale of assets
Fixed assets usually generate income for the company. They can be tangible, such as land, building or machinery. Or they can be intangible, such as patents or brand names.
opportunity cost
The potential cost of missing an opportunity by choosing one option and foregoing another.
short term sources of finance
repaid within less than a year
. These are normally used to solve cash flow problems or to pay for revenue expenditure
when is selling assets apropriate
Selling assets may be appropriate if a business changes its objectives and needs money to invest in a new strategy.
medium term sources of finance
longer than a year but less than 5
The most commonly used medium-term source of finance is a bank loan.
long term sources of finance
longer than 5 years
personal funds characteristics
long,medium and short term
opportunity cost- other actions could have been funded with money
no loss of control
suitable for small businesses without large funding needs
retained profits characteristics
long medium and short term
opportunity cost- loss of dividens to shareholder
no loss of control
all businesses benefit
sale of assets characteristics
opportunity cost- loss of ability to use assests for production
no loss of control
all busineses benefits
groups of external sources of finance
equity finance
debt finance
other sources of finance
external sources of finance
Money for a business that is raised from outside the business, such a bank loan.
share capital external source
Finance for a business that is raised through the issue of shares to new investors on a stock market.
pros and cons of share capital + term
pro- large sums are generates, good for big companies’
cons- reduce control, not suitable for private and small companies
long term
business angels external source
A wealthy business person who invests their money into new businesses.
pros and cons of business angels + term
pro- provides funding for businesses not listed in stock, very early finance to new business, offer skills and mentor, good for small companies
con0 take parts of profit, loss of control, conflict between angel and owner
long term
Loan capital external source
is a medium or long-term source of finance, often used to buy fixed assets. A mortgage is a special type of long-term loan that is used to purchase land or buildings.
loan capital pros and cons + term
pro- money available imediatley
con- small businesses dont have collateral so it is difficult to loan
long term
overdrafts external source
A high-cost, short-term loan attached to a bank account; allows the account holder to withdraw an amount of money that is greater than the amount they currently hold.
overdraft pros and cons
pro- fast access to money and enable to meet day to day expenses
con- overdraft allowence is limited, expensive form of borrowing
microfinance providers external source
Financial services provided to individuals who have very limited income and assets and are not able to get services from traditional banks.
microfinance provider pros and cons+ term
pro- dont require collateral, secure loan
cons- small loans, interest rate is high
short term
crowdfunding external source+ types of crowd funding
A form of finance where many people, perhaps thousands, invest small amounts of money to fund a business or project.
Peer-to -peer lending: many investors providing a loan that earns interest
Equity crowdfunding: many investors acquire a small share of ownership in the business
Rewards-based crowdfunding- many investors receive non-financial reward at a later date like product or service
Donation bases crowd funding- the participants are doners and don’t receve anything
pros and cons of crowd funding+ term
easy to happen, fast
needs platform, can loose power
short and medium term
leasing external source
A business renting (hiring) a fixed asset over a period of time, rather than buying it.
leasing pros and cons + term
-pro: use assets without having to fully finance it up front, businesses can always return assests for latest model, businesses doesnt need to worry about maintaining or repairing equipment, lower costs
-con: business doesnt own asset
short and medium term
trade credit external finance
A type of external finance whereby a business receives products from a supplier immediately, but pays for them at a later date.
trade credit pros and cons + term
pro- more time to pay using profits from products
short term
howto evaluate source of finance
consider:
type and size of business
purpose of business and objectives
risk tollerance of the business
