5.3a Sources of Finance Flashcards
What does internal sources include?
- Founder finance
- Retained profits
- Debt factoring
What does external sources include?
- Bank loans
- Bank overdraft
- Venture capitalists
Short term finance definition
Finance intended for repayment within 12 months
Long-term finance definition
Finance intended for repayment after 1 year +
Capital expenditure definition
Spending on items that can be used again
Revenue expenditure
Spending on current, day to day costs e.g. raw materials
Debt factoring definition
When a factoring company buys the right to collect money from the credit sales of the business
How does debt factoring work?
The factoring company pays the business 80-90% of face value of the debts and then collects the full amount of debts itself
Advantages of debt factoring
- Improved cash flow in a short time
- Lower admin costs
- Increased efficiency
Disadvantages of debt factoring
- Loss of revenue
- High cost
- Customer relations problems
Advantages of bank overdrafts
- Flexible
- Interest is only paid on amount of overdraft being used
- Security is not usually required
Disadvantages of bank overdrafts
- Level of interest rate charged
- Flexible interest rates
- Banks can demand immediate repayment
Retained profit definition
Cash reinvested into the business
Advantages of retained profit
- Cheap source
- No security required
- Management of dividend payments
Disadvantages of retained profit
- Impact on dividends to shareholders
- Misuse of funds
- Opportunity cost
Advantages of share captial
- Can be large
- Can be long term
- New shareholders can bring expertise
Disadvantages of share capital
- Complex to issue
- Usually dividends to pay
- Loss of ownership
Advantages of bank loans
- Easy for budgeting
- Lower interest rates
- Designed to meet company’s needs
Disadvantages of bank loans
- Limitation on amount available
- Inflexibility
- Potential expense
Venture capitalists definition
High net worth individuals who invest in high growth businesses
Investment range for venture capitalists
£10,000 - £750,000
Venture capitalists are also known as
Business angels
Advantages of venture capitalists
- Suited to high risk companies
- Interest and dividends can be delayed sometimes
- Source of advice
Disadvantages of venture capitalists
- Some ownership is given up
- Excessive influence
Debenture definition
Long-term loan made to a business at an agreed fixed interest repayable on set date
Traditional length of debentures
25 years
Alternative sources of finance
- Sale and leaseback
- Mortgages
- Sale of assets
Source of finance depends on
- Size/profitability
- Amount required
- Level of risk involved
What is rationalisation?
When managers reorganise the business to make it more efficient through selling assets
Advantage of rationalisation:
Don’t need to pay interest on finance raised
Disadvantages of rationalisation:
- No longer own asset
- Assets lose value over time so won’t get as much as they paid for them
What do businesses need to consider when choosing a source of finance?
- Legal structure
- Amount required
- Level of risk
- Short or long term
What does capital structure refer to?
The way in which a business raises capital to purchase assets
