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Sources of finance (INTERNAL ; raised from the business's own…
Sources of finance
INTERNAL
; raised from the business's own assets
Sale of assets
• Asset that are no longer fully employed
• Could be sold to raise cash
• Still intend to use, but they do not need to own
• Sold to a leasing specialist & leased back by the company
• Raise capital but and additional fixed cost in the leasing and rental payment
Managing working capital more efficiently
• Reduce working capital by cutting current assets by selling stocks or reducing debts
• May reduce the firm’s liquidity (ability to pay short-term debts)
Profits retained in the business
• Refrained profit is the profit left after deductions of corporation tax and dividens
• Permanent source of finance
• Will not be paid out to shareholders
• Source of funds for expansion & invested back into the business
Personal finds (sole traders)
Owner's savings
Adds to the business risk for the entrepreneur Limited to the amount of the owner has in their savings
Lack of interest payments
More control the owner has over the business
EXTERNAL
; sources outside the business
Medium-term finance
Hire purchase and leasing
Hire purchase
• A form of credit for purchasing an asset over a period of time (temporarily)
• Avoids making a large initial cash payment to buy the asset
Leasing
• A contract with a leasing/finance company to acquire, but not necessarily to purchase
• Periodic payment is made over the life of the agreement but does not have to purchase the asset
• Allows firms to avoid cash purchase of the asset
• Risk of using unreliable/outdated equipment is reduced as the leasing company will repair and update the asset
• It’s not cheap but it improves the short-term cash-flow of a company compared to outright purchase an asset
Obtain fixed assets with a medium life span (1-5 years)
Medium-term bank loan
Long-term finance
Debentures
• a company wishing to raise funds will issue/sell to interested investors
• company agrees to pay a fixed rate of interest each year for the life of the debenture (can be up to 25 years)
• buyers may resell to other investors
• usually not secured on a particular asset
• when they are secured, it is known as mortgage debenture
• very important source of long-term finance
Long-term loan from bank
s
• Offered a variable/fixed interest rate
• Fixed rate provides more certainty but expensive if agreed at a time of high interest rates
• Have to provide security/collateral for the loan
• The right to sell an asset is given to the bank if the company cannot repay
• Business with few assets is difficult to obtain loans from banks or may be asked to pay higher rates of interest
Short-term finance
Trade credit
• Delaying the payment of bills obtains source finance
• Suppliers provide good and services without receiving immediate payment
• Pay their suppliers within 1-2 months
• Although, discounts and supplier confidence are often lost if the business takes too long to pay
Debt factoring
; Selling of claims over debtors to a debt factor in exchange for immediate liquidity, only a propotion of the value of the debts will be received as cash
• A business creates a debtor if they sell good on credit
• A business can sell this claims on debtor to a debt factor
• Immediate cash is obtained but not the full amount of the debt
• Debt-factoring company’s profit are made by discounting the debts and not paying their full value
• Smaller firms often sell the debt to credit-loan firms so that the credit agreement is never with the firm but with the specialist provider
Bank overdrafts
• Most flexible
• Amount of finance vary depending on the needs
• The bank allow a business to overdraw on its account by writing cheques
• Amount should be agreed in advance and has a limit
• Business may need to increase the overdraft for short periods of time if customers does not pay quickly or a large delivery stock has to be paid
• Carries high interest charges
• If a bank becomes concerned about the stability of the customer, they can call in the overdraft & force the firm to pay it back which may lead to business failure