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Entrepreneurial Finance (Sources of Finance (Equity Finance:
A stake or…
Entrepreneurial Finance
Sources of Finance
Overdrafts:
Option to borrow, provided by a bank, which is flexible in a sense of borrowing up to an agree limit whenever required!
Expected to fund operational needs (working capital) and to even out fluctuations in cash flow
Disadvantages: immediately repayable on demand - interest rate can be punitive if limit is exceeded
Grants or Subsidized Loans:
A grant is non-repayable.
Subsidized loans are repayable with an interest rate below commercial rates
Term Loans:
made by banks for a fixed period of time - repayment is required of both amount borrowed and interest - at agreed regular intervals
Used to purchase fixed assets like machinery
Asset Finance:
acquire the use of an asset; can finance in 2 ways:
Hire purchase - regular payments for a fixed time period to cover purchase price - once repaid ownership transfers
Leasing - ownership of asset never transfers from leaser
Credit Cards:
purchase assets or to smooth variations in operational needs by providing access to quick and convenient cash - punitive interest rates
Equity Finance:
A stake or ownership share in the business - choose to sell some ownership in return for a cash sum; provides a cash boost
Downside - no longer full control by owner
Provide funds on expectation ownership stake will rise in value - sell at a higher price and make capital gains
Formal equity finance - established and normally specialist financial institutions - Venture Capitalists
Informal EF - Business Angels - wealthy individuals/groups looking to diversify their wealth porttfolio
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Asset-based finance:
Factoring - selling invoices (sales not yet paid) to a 3rd party in return for a proportion of the unpaid invoice
Invoice Discounting - borrowing against unpaid invoices
Stock Finance - raises finance against the stock held
Other - Trade Credit:
acquire the use of an asserts without paying for it until some point in the future
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Changes over time
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Evidence indicates access to finance, until the 2008 recession had become LESS problematic for SBs
Onset of 2008 recession:
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in 2004, 1 in 4 had used a short-term loan and 1 in 3 used some form of asset financing
in 2008, virtually all sources of finance were used LESS!!
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Steady maturing and a wider range of external finance used by smaller businesses - however, access remains CONTINGENT on macroeconomic conditions
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