Sources of Finance

Question 1

Internal sources of finance: retained profits

Answer 1

Profits that have not been distributed to the owners or shareholders; profits that are reinvested in the business

Question 2

External sources of finance: Debt - Short-term (overdraft)

Answer 2

An agreement with the bank to withdraw more funds than you have in the accounts. Overdraft facility must be agreed in advance.

Question 3

External sources of finance: Debt - Short-term (commercial bills)

Answer 3

A short term loan from a financial institution (over $100,000 generally)

Question 4

External sources of finance: Debt - Short-term (factoring)

Answer 4

The sale of accounts receivable (unpaid customer invoices) to a factoring company in return for immediate cash - normally around 80% of invoice value

Question 5

External sources of finance: Debt - Long-term (mortgage)

Answer 5

A loan to buy land or property

Question 6

External sources of finance: Debt - Long-term (Debentures)

Answer 6

A loan with interest that is paid back in full at a future date. Can be from another company, secured on an asset.

Question 7

External sources of finance: Debt - Long-term (Unsecured notes)

Answer 7

Same as a debenture but no security needed, higher interest rate

Question 8

External sources of finance: Debt - Long-term (Leasing)

Answer 8

Renting rather than buying assets

Question 9

External sources of finance: Equity (New issue)

Answer 9

An IPO or flotation - where a private company sells shares to the public for the first time via the ASX and becomes LTD.

Question 10

External sources of finance: Equity (Rights issues)

Answer 10

A further issues of shares by a public company to its existing shareholders to raise more equity capital. Shares are offered on a ratio (proportion) basis e.g. 1:5 = 1 share for every 5 already owned.

Question 11

External sources of finance: Equity (placements)

Answer 11

Further issue of shares offered to SOME existing shareholders, normally institutional investors

Question 12

External sources of finance: Equity (share purchase plan)

Answer 12

Same as a rights issue, but shares are offered in tranches e.g. of $10,000, to existing shareholders

Question 13

External sources of finance: Equity (Private equity)

Answer 13

Part of a business is sold to a firm of venture capitalists who help to run the business or provide mentoring advice