LOD Flashcards
Sources of finance
Financing of a business is one of the fundamental areas for the successful dunning of a business.financing can happen at any stage of a businesss life. It can be when the business first starts or when it wants to expand and grow.
Choosing the most important source of finance for the businesses needs is vital as it can impact the cash flow of the business but also its ownership.
What do businesses need finance for
- starting up
-everyday running of the business
-expansion
-internal growth
-take overs
-equipment/macbinery
Internal sources of finance
Internal sources of finance come from within the business. This is the finance or capital which is generated internally by the business. Unlike external sources of finance externally sourced from, banks or financial institutions such as loans.
How can a business internally finance it’s business
Retained profit
Net current assets
Sale or asset
Retainers profits
Advantages
No interest charges
Available immediately
Avoids debt
No loss of
ownership
Disadvantages
Amount available may be limited
Could cause shareholder dissatisfaction as dividend payment would be reduced
Once used it cannot be used for other purposes
When a business makes a profit it. A decide whether to take that money out of the business as a salary or a dividend similarly they can decide to reinvest it back into the business to expand or buy new equipment.
Net current assets
Net current assets are currreht assets minus current liabilities. If you have positive net current assets then this can be used by the business to fund day to day expenses
Advantages
Quick way of raising money
Encourages the business to manage its cash flow
Disadvantages
Short term credits can ruin relationships with customers
Holding less stock could impact availability
May have to set lower prices to sell through stock quicker.
Sales of assets
Advantages
Good way of raising funds from, assets no longer needed
No interest charged
Reduces capita tied up in useless assets
Disadvantage
May not receive full value of the assets if a quick sale is needed
If the asset is needed then costs could increase to lease a similar asset back.
A business can sell that assets they have in order to recive a cash injection. E.g the business can have land, property or machinery that it could sell and the use that can to invest in something else that may be more useful to the business.
External sources of finance
Refers to money that comes from outside a business
When a companyneeds a lot of money and it’s internal sources of finance are exhausted, the company can look to external sources for that finance.
Examples of external sources of finance
-owners capital
-crowd funding
-debt factoring
loans
-mortgages
-venture capital
-debt factoring
-hire purchase
-leasing
-trade credit
-grants
-donations
-peer to peer lending
-invoice discounting
Owners capital
Source of external finance is from the owners personal finances and is used to finance the business
Although this person owns the business it is still classed as an external source of finance as it comes from outside the business
Advantages
No interest payed
No repayment schedule
No loss of ownership
Disadvantages
Limited amount available
Personal finance are at risk
Could cause friction between owners if all are not able to contribute the same amounts.
Loans
A bank Loan is money lent to an individual or business that is paid off with interest over an agreed period . Usually the rate of the interest is fixed.
This means that the business knows in advance what the cost of borrowing will be and what monthly repayments will be required.
This allows the business to manage their cash flow .
Advantages
-Easy to budget as repayments are pre-arranged
-no loss of ownership
Disadvantages
-interest charged
-usually secured against an asset that could be seized if loan is not repaid
Show financial statement to banks to secure the loan.
Crowdfunding
Involves many people investing small amounts of money in a business. Usually online
Commonly used crowdfunding websites include crowdfunded gofundme and kickstart
It provides opportunities for individuals to start up a business even if they don’t have access to other sources of funding.
It can be difficult to reach the funding target. Statistics from crowdfunding websites indicate that less than 33% do business achieve their funding target.
Mortgages
Advantages
Large amounts of finance can be acquired and then repaid over a long period of time
No loss of ownership or control
Disadvantages
Interest charged on amount borrowed
Secured against asset that could be seized
Not suitable as a short term source of finance
A mortgage is a long term source of finance. It is a sum of money borrowed from the bank that is secured against a property and paid back in instalments usually over a long time period. 30 years
Venture capital
Money invested by an individual or group that is willing to take the risk of funding a new business in exchange of an agreed share of the profits
The venture capital will want a return on their invest,ent as well as input into how the business is run.
Venture capital is money that is investors provide to a company that is starting up or expanding. Venture capital is usually used when there is an elesemnt or risk with the business.
Advantages
Finance is made available along with advice and monitoring.
Finance may be easier to obtain as venture capitalists are usually high risk high reward people
Disadvantages
Loss of ownership and control
Conflict may occur over the direction of the business
Debt factoring
Involves a business selling their invoices to a third party at a discounted price in order to bypass the hefty waiting times which are associated with invoice payments.
This means they receive the money they are owned quickly however it comes at a cost as they get a discounted amount from the debt factoring company
Advantages
Involves the business cash flow
Reduces risk of default on payments
Disadvantages
Only receive a % of the amount the business is owed.
I’m can alienate customers
Hire purchase
Used to purchase an asset such as delivery van or piece of equpment
A deposit is paid and the remaining amount for the asset is paid in monthly instalments over a set period.
Business does not own the item until all payments are made.
Advantages
Regular payments are good for budgeting
Spreads out the cost of an asset
Avoids paying a large lump sum
Disadvantages
Likely to cost more than buying the asset outright
Only suitable for lower costs items such as vehicles not land or building.
Leasing
Way of renting an asset that the business requires such as a coffee machine.
Monthly payments are made, the leasing company is responsible for the provision and upkeep of the leased item.
Unlike hire purchase the item is not owed at the end of the payments by the business. .
Advantages
Maintained and repairs are the responsibility of the supplier
Spreads the costs of the asset rather than paying a lump sum
Disadvantages
Likely costs more then buying outright
Never actually own the asset so the payments are ongoing.
Trade credit
Must be agreed with supplier
It’s a source of finance
Allows a business to obtain raw materials and stock but pay for them later.
Credit limit - maximum amount of credit available to the business
Credit period - length
of time the business has to pay what is owed, usually 30,60 or 90 days
Frequency of payment- how often payment is required
Method of payment- the way in which the business makes the payment
Resteosoectuve discount - discount given when the business has purchased a certain amount of stock on raw material.
Grants
A grant is a fixed amount of money usually awarded by the government. EU or charitable organisations.
Grants are usually given to a business on the condition that they meet certain criteria such as providing jobs in an area of high employment.
Advantages
Does not need to be repaid
No interest payments
No loss of ownership or control
Disadvantage
Have to meet certain conditions
Takes a long time to apply
Donations
An extremely important source of finance for a non profit organisation such as charity or social enterprise
Donations are relied upon for the continual running and day to day upkeep of such organisations
Advantages
No need to repay
No interest charged
No loss of ownership or control Disadvantage
Disadvantages
Not reliable
Usually relieved in small amounts
Peer to peer lending
Way for people to lend money to individuals or businesses
The lender lends the money to an organisation or individual. In return the lender receives interest on top of the amount lent out.
Invoice discounting
Like debt factoring, invoice discounting is a form of short term borrowing against your outstanding invoices. It is usually used to help improve a company’s working capital and cash flow position.
Gives tiny access to the money in unpaid customer invoices much faster instead of waitimh fir your customer too pay your invoices, you take out a short term loan from an invoice discounting company.
These companies willl lend you up to 97% of t,he value of the invoices paying you the money in a matter of days r after than weeks. Once you receive payment from your customer you pay back the loan
Advantages
No need to right epay
No interest charged
Reduces cost to the business.
Disadvantage
Often only available if purchases are made in cash
Negativity impacts cash flow
