Sources of finance Details Flashcards
Main internal sources of finance
-Personal funds
-Retained profits
-Sale of assets
Characteristics of personal funds
-Long, medium and short-term finance
-Opportunity costs(other actions could’ve been funded with the money)
-No loss of control
-Suitable for small businesses(with large funding needs)
Characteristics of retained profits
-Long, medium and short-term finance
-Opportunity costs(loss of dividends to shareholders)
-No loss of control
-Suitable for small businesses(with large funding needs)
Characteristics of selling assets
-Length of finance depends on the asset’s size
-Opportunity cost(loss of ability to use assets for production)
-No loss of control
-Can be used by all businesses
Length of short-term sources of finance
Less than one year
Length of medium-term sources of finance
1-5 years
Length of long-term sources of finance
More than 5 years
Examples of short-term sources of finance
-Trade credit
-Overdrafts
Examples of long-term sources of finance
-All forms of equity finance
-Mortgages
Types of external sources of finance
-Equity finance
-Debt finance
-Other sources of finance
Advantages of equity finance
-Does not have to be repaid(no interest is charged)
-Risks are shared among multiple owners
Disadvantages of equity finance
-Loss of control
-Loss of a portion of future dividends(some profits go to other owner)
Categories of equity finance
-Business angel
-Venture capital
-Share capital
Business angels provide early financing and guidance to a new business in return for part ownership of the business and a portion of future profits(T/F)
True
Entrepreneurs usually have to persuade the business angel to invest with a solid business plan and their personality(T/F)
True
How share capital works
-A business shares all or part of the business(in the form of shares) to external shareholders
-In exchange,the shareholders receive a dividend
Forms of debt finance
-Loan capital
-Overdrafts
-Microfinance
-Trade credit
Features of loan capital
-Medium or long-term source of finance
-Money is available immediately for investments, but is repaid in small chunks, over a period of years
-Collateral is usually provided
Features of overdrafts
-Overdrafts must be arranged in advance with the bank
-In effect, the bank lends you money so that you can make a purchase
-As money is paid into the account, the overdraft will be paid back first, before any positive balance is recorded in the account
-Banks typically charge a very high interest rate
Features of microcredit
-Usually does not require collateral
-Often given to small groups of borrowers in a community(so borrowers can help each other repay their loans)
-Loan amounts are relatively small
-Short-term finance
-Relatively high interest rates
Features of trade credit
-Short-term finance
-No interest is charged during credit period
Other sources of finance include…
-Leasing
-Crowdfunding
Types of crowdfunding
-Peer-to-peer ledning(many investors providing a loan that earns interest)
-Equity crowdfunding(the many investors acquire a small share of ownership in the business)
-Rewards-based crowdfunding(many investors receive a non-financial reward such as a product from the business at a later date)
-Donation-based funding(the participants are donors and do not receive anything in return)
Facators which sources finances should be used
-The type and size of the business
-The purpose of the business and the objectives of the financing
-The risk tolerance of the business/owners
Generally, it is best for a business to borrow money only in a lower-risk situation, and to seek other avenues if the risks are higher(T/F)
True
