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3.1 SOURCES OF FINANCE (FACTORS INFLUENCING FINANCE CHOICE (Amount…
3.1 SOURCES OF FINANCE
EXPENDITURE
Capital
The purchase of assets that are expected to last for more than one year
Machinery
Buildings
Revenue
Spending on all costs and assets other than fixed assets
INTERNAL SOURCES OF FINANCE
Retained profits
Profit left after all the deductions including dividends have been made
A newly formed company/company with loss will not have this source
Sales of Assets
Sell assets that are no longer fully employed to raise cash
Sold to a leasing specialist and leased back by the company
Personal finds (for sole traders)
Owner's savings
Adds to the business risk for the entrepreneur
Finances of the firm are limited to the amount the owner has
Advantages
The lack of interest payments
The control the owner has over the business
Reductions in Working Capital
Increase stock levels, reduce assets, reduce working capitals
May reduce the firm's liquidity
EXTERNAL SOURCES OF FINANCE
Medium-term Finance
Hire Purchase
An asset is sold to a company which agrees to make fixed repayments over an agreed time period
The asset belongs to the company
Leasing
Obtaining the use of equipment or vehicles
Paying a rental or leasing charge over a fixed period
Avoids the need for the business to raise long-term capital to buy the asset
Ownership remains with the leasing company
Medium-term Bank Loan
Long-term Finance
EQUITY FINANCE
Long-term loans from banks
Loans that do not have to be repaid for at least one year
Debentures
Bonds issued by companies to raise debt finance, often with a fixed rate of interest
OTHER SOURCES
Grants
Venture capital
Risk capital invested in business start-ups or expanding small businesses
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
Subsidies
Short-term Finance
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
Trade credit
Delaying the payment of bills for good or services received
Bank loan
Bank overdraft
Bank agrees to a business borrowing up to an agreed limit as and when required
FACTORS INFLUENCING FINANCE CHOICE
Amount required
Legal structure and desire to retain control
Cost
Size of existing borrowing
Use and time period for which finance is required
Flexibility