Unit 1 AOS 2 KK7 Flashcards
Internal source of finance (equity finance)
Self funding - bootstrapping, family/friends, private investors, shares, crowd funding
Equity
An advantage as it does not have to be repaid unless the owner leaves the business, it is cheaper than other sources of finance as there are no interest payments
Self funding
the owner to the business uses their personal finance, however they could potential the owner will lose all their money. (aka bootstrapping)
Family/ friends
danger of relationships being affected, details of arrangements should be put in writing
Private investors
an investor may contribute funds into the business in retail for a share of the business profits. Investors such as business angel or angel investors can provide the business with funds and supports. The owner will lose some control
Shares
business may raise funds by offering shares. Companies can make use of this source of finance. Public companies can access more capital than private companies as they can issues shares to the public.
Crowdfunding
used by online and social media network like GoFundMe. It is a quick way to raise funds with little fees. However a great deal of public interest is needed and failed to project may damage business reputation.
External sources of finance
Short term borrowing: bank overdraft, bank bills and trade credit. Long term borrowing ( loan leasing), Government grants
External sources of finance - short term
Bank overdrafts and bank commercial bills
Bank overdrafts
a bank allows a business to overdraw its account to an agreed limit. The costs are minimal and the interest rates are normal lower
Bank commercial bills
Bank loans a supplier provides products to a business with an agreement to chard for the goods or services later. There is no interest charged
External sources of finance - long term
loan and leasing
Loan
a business loan is intended for a business purposes. A mortgage is a loan secured by the property of the borrow (the business). The property that is mortgaged cannot be used of sold as security for further borrowing until it is paid.
Leasing
long term source of borrowing involving paying money to use equipment that is owned by another party.
External sources of finance - grants
Government can also provide finance to business in the form of grants, especially to promote exports. This can be done through federal and state level.
They are administered through business development departments or small business development centres, which advise individuals on setting up and administering a business.
