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External Sources of Finance - Coggle Diagram
External Sources of Finance
Share Capital
Finance raised from the sales of shares
Shareholder will be rewarded for their investment by the payment of dividend
Issuing shares is a complex and costly process so only really an option for raising large amount of finance to fund long term project
Advantage
Only need to pay dividend if a profit is being made and the amount of dividend is not fixed
Possible to raise large amount of finance
No interest rapayment
Disadvantages
Loss of ownership as shareholder are part owners
Complex and costly process of issuing shares, especially for Plc
Donations
Finance provided by an individuals or organisation to support the activities of another organisation
Normally available to non-profit organisation such as charities
Advantages
Relies on the generosity of others ( can be disadvantage)
Have to ensure the cost of receiving the donation does not weight the amount
Disadvantages
May be severely out at time of economic difficulties
Hire purchases 分期付款
Allows a business to enjoy the use of an asset whilst paying for it in regular instalment
The assets remains the property of the seller up until the point where all instalments have been made at which point it has become the property of the buyer
Advantages
Avoids one off lump sum of payments
Disadvantages
Interest will normally be charged on top of the cost of the assts.
Venture Capital 风险投资
Investment from one establish business into another business in return for a percentage equity in the business and the venture capitalist provide advice and support to the high risk firm
Advantages
Expertise to help business
Makes it easier to attract other source of finance
Provides the required capital for expansion
Disadvantages
A long and complex process
Initally expensive for the firm e.g. legal and accounting fees
Partial loss pf ownership
Risk of conflict or perceive interference
Peer to peer lending (P2P)
The practise of an individual leading to other individuals with whom there is no relationship or contact
Advantages
Normally an secured personal loan although on some occasion collateral may offered
Cuts out the use of traditional intermediaties, e.g. bank
Disadvantages
Borrowers are given a credit rating
Loans
A set amount of money provided for a specific purpose, to be repaid with interest, over a set period of time.
May be secured against an asset and if there is a default on repayment the asset can be taken
Financial institution can vary interest rate depend on the amount of risk placed on the loan
Suitable for longer-term project
Advantages
Quick and easy to secure
Fixed interest rates allows firms to budget
Improve cash flow
Disadvantages
Interest must be paid regardless of financial performance
A firm that is highly geared may be seen as high risk
Trade credit 贸易信贷
Trade credit is paying suppliers a period of time after the goods or service have been received
In effect, the supplier is providing the business with finance for the trade credit, e.g. 30 days
Advantages
This improves the cash flow of the firm receiving the suppliers
Disadvantages
This business may lose out on discounts offered for immediate or quick payment increasing costs
Debt Factoring 债务工司
The process of selling the debt owned to a business to a financial institution
The business will receive funds immediately but at a reduced rate, e.g. may only receive 80% of the debt
After the debt has been paid the business will receive further payment but the financial institution will keep a percentage of the repayment fee
Advantages
Receive large amount of debt immediately
Good source of short-term finance to address cash flow problem
Debt are chased by experts saving managers time
Disadvantages
Reduce profitability of the firm as a result of the fee paid to the financial institution
May damage the reputation of the firm as they are seen to be in need of short term finance
invoice discounting
Business may be able to negotiate a discount In invoice from suppliers
Advantages
This in effect reduce costs, hence freeing up finance for other purposes
Disadvantages
Although finance is received helping cash flow in the short term, this may have a negative effect on profitability in the longer term
Leasing 租凭
Leasing allows a business to benefit from the use of an asset without owning it or buying it outright
The business pays a set amount in instalment to lease the asset for a pre determined period of time
Advantages
Avoids the need to finance the asset
At the end of the lease period, the business may start a new lease agreement for the latest model, e.g. new spec photocopier
The lease company is responsible for any repairs and maintenance
Disadvantages
May be more costly in the long run
The assets remains property of the leasing company and at the end of the time period, the asset is returned to the lease company
Grants
Grant are fixed amount of capital provided to business by the government or other organisations to fund specific projects
Often conditions are attached to the grants for example:
Provide employment
Advantages
Does not have to be paid back
Disadvantages
A loyt of businesses apply for a government grant, therefore, it is not a reliable way of raising finance
Crowded Funding
Involves raising finance form a large number of propane each investing different, often small, amount of money vi at the Internet, can done through donation, investment or loan with interest charge. (Using internet to explain)
Advantages
Getting feedback and expert guidance on how to improve it
A good way to test the public's reaction to your product/ideas
Disadvantages
The investor is only tied into their promised contribution if the total amount is raised
it can mean giving away too much of the business to investor
Mortgage
Legal agreement between debtor and lender; buying loan with property
Advantages
Long time to pay back the loan
Interest rate on mortgage tend to be lower, because its against your property
Disadvantages
Property risk if money are not paid back
Could end up more than you borrow because its over 25 year, carrying enormous debt over long time