Chapter 3.2 - Sources of finance Flashcards
Business angels
Extremely wealthy individuals who risk their own money by investing in small to medium businesses that have high growth potential
Crowdfunding
The practice of raising finance for a business venture or project by getting small amounts of money from a large number of people, usually through online platforms
External sources of finance
The funds from outside of the organization, such as through debt, share capital (overdrafts and loan capital), and business angels
Initial public offering (IPO)
Refers to a business converting its legal status to a publicly traded company by floating (selling) its shares on a stock exchange for the first time
Internal sources of finance
Funds generated from within the organization, namely through personal funds, retained profits, and the sales of assets
Leasing
A form of hiring whereby a lessee pays rental income to hire assets from the lessor, the legal owner of the assets
Loan capital/debt capital
Refers to medium to long-term sources of interest-bearing finance obtained from commercial lenders
Long-term sources of finance
Those available for any period of more than 12 months from the accounting period, used for the purchase of fixed assets or to finance the expansion of a business
Microfinance
A type of financial service aimed at entrepreneurs of small businesses, especially females and those on low incomes
Overdrafts
Allow a business to spend more than the amount in its bank account, up to a pre-determined limit. The most flexible form of borrowing for most businesses in the short term
Personal funds
A source of internal finance, referring to the use of an entrepreneur’s savings. Personal funds are usually used to finance business start-ups for sole traders
Retained profit
The cumulative net earnings of a business that they keep to use after deducting dividend payments
Sales of assets
Selling existing items of value that the business owns, such as dormant assets (unused) and obsolete (outdated) assets
Share capital
The money raised from selling shares in a limited liability company
Share issue/share placement
An existing publicly held company raises further finance by selling more of its shares
Short-term sources of finance
Those available for less than one year, used to pay for the daily or routine operations of the business, such as overdrafts and trade credit
Sources of finance
The general term used to refer to where or how businesses obtain their funds, such as from personal funds, retained profits, loan capital, and share capital
Stock exchange
A highly regulated marketplace where individuals and businesses can buy and/or sell shares in publicly traded companies
Trade credit
Allows a business to postpone payments or to “buy now and pay later”. The credit provider does not receive any cash from the buyer until a later date
