Please enable JavaScript.

Coggle requires JavaScript to display documents.

3.1 Source of Finance (working capital (capital needed to operate the…

- - - - profit left after all deductions, including dividends
        
        some will be paid to the shareholders (dividends) or owners
        
        retained profits will not be paid out to shareholders; as a permanent source of finance
        
        some of the profits will be taken in tax by government (corporate tax)
    - - some still sell used assets, but no longer need to own
      - sold assets that are no longer fully used to raise cash
    - - the sole traders have to face the risk of his/her business in terms of finance
      - lack of interest payments for being the sole trader of finance
      - used owner's saving to start up new business
- - - - leasing
        
        obtaining the use of equipment or vehicles and paying a rental or leasing charge over a fixed period. this avoids the need for the business to raise long-term capital to buy the ownership remains with the leasing company
      - hire purchase
        
        an asset is solid to a company which agrees to make fixed repayments over an agreed time period; the asset belongs to the company
        
        a form of credit for purchasing an asset over a period of time
    - - trade credit
        
        discounts for quick payment and supplier confidence are often list if the business takes too long to pay its suppliers
        
        delaying the payment of bills for goods and services recieved
      - debt factoring
        
        selling of claims over debtors to a debt factor in exchange for immediate liquidity; only a proportion of the value of the debts will be received as cash
      - bank overdrafts
        
        bank agrees to a business borrowing up an agreed limit as and when required
        
        often carries high interest charges
        
        bank allows a business to 'overdraw' on its account by writing cheques to a greater value than the balance in the account
        
        most flexible of all sources of finance
    - - long-term loans from bank
        
        companies making a loan should provide security or collateral for the loan
        
        sell an asset to the bank if cannot repay
      - debentures
        
        bonds issued by companies to raise debt finance, often with a fixed rate of interest
        
        buyers may resell to other investors if they do not wish to wait until maturity before getting their original investment back
      - share issues
        
        equity finance ; permanent finance raised by companies through the sale of shares
      - grants
        
        financial gifts from goverments to support business activities
        
        typically one time payment, no need to be repaid
      - advantages of debt finance
        
        loans will be repaid eventually, so there is no permanent increase in the liabilities of the business
        
        ownership of company does not change as there is no shares being sold
      - venture capital
        
        risk capital invested in business start ups or expanding small businesses, which have good profit potential, but do not find it easy to gain finance from other sources
      - business angels
        
        individual investors who put in their own money in a variety of businesses and are seeking a better return than they would obtain from conventional investments
        
        disadvantages
        
        business owners still need to gain investors' trust
        
        will want to share ownership and will require a certain part of the profit of business
        
        advantages
        
        investor can easily make an investment without difficult assessments
        
        concrete their investments within a small geographical area hence have a better local knowledge
      - advantages of equity capital
        
        never has to be repaid; permanent capital
        
        no need to pay dividends every year
      - microfinance
        
        provision of very small loans by specialist finance businesses, usually not traditional commercial banks
      - subsidies
        
        financial benefits given by government to a business to reduce costs and encourage increased production