Sources of capital
Internal Finance
External Finance
Long term
Short term
Overdrafts
Working capital
Debt factoring
Sales of assets
Retained profit
Grants
Owner's funds
Leasing
Trade credit
Debentures
Venture capital
Bank loans
Sale and leaseback
Hire purchase
Share issue
A firm could sell buildings , vehicles or even parts of its business as a way of generating fund.
Money obtained from within the business
A sole trader or members of a partnership may inject(put in) more of their own money into a business.
Once a business starts to make profit, it can use this profit as a source of finance.
It is the money available for immediate use to fund day-to-day operations.
Disadvantage: 1. There is a greater financial risk for the owners. 2. Business owners can be willing to face considerable risks - some even use their personal credit cards to pay for business expenses.
Advantages: 1. It provides a quick, interest-free source of funds.
Disadvantages: 1.It is not always available.(A firm needs to make profits to reinvest them.) 2. Owners receive less reward for their risk(lower return on money invested in the business.)
Advantages: 1. It provides an interest- free source of funds.
Disadvantages: 1. Money is not always available. (A firm may need its working capital to cover immediate expenses.)
2.A firm must ensure it still has sufficient stock to meet customer demand.
Advantage: Efficient management of cash is good business practice.
Disadvantages: 1.The firm loses the use of the asset.
2.Finance is only available if an asset can be sold(which may take time)
Advantage: 1. It can enable a business to release large sums of money.
Money obtained from sources outside of the business.
Short-sources of finance are used to fund revenue expenditure and are usually repaid within one year
It is effectively a short-term bank loan, a bank allows a business to draw out of its accounts more money than it has deposited(put in)
Disadvantages: 1. In return flexibility, the banks charge high interest rates and fees - if used over the long term, this makes overdrafts very expensive.
Advantages: 1. It is cheaper than a bank loan. 2. It is a flexible way for business to borrow small amounts for very short periods of time.
A business does not pay immediately for the goods it purchase; instead it may be given 30, 60 or 90 days to pay.
Disadvantages: 1.Start-ups and young firms may not be offered credit unless they have proven their ability to pay. 2. Trade credit needs to be carefully managed to avoid overtrading and cash flow crisis.
Advantages of debentures: Debentures provide a source of very long term finance
interest rates may be cheaper than bank loans
Advantages: 1. Trade credit is interest-free and easily available. 2. It is possible to secure early payment discount if accounts are settled(paid) before the deadline - the firm benefits from the credit and from a discounted price.
Disadvantages: they are only available to large limited companies
Advantages: there is lower initial capital requirement ( less money needed) to gain use of an asset
it spreads the impact on cash flow.
the firm does not have to worry about care and maintenance of the asset
the firm can replace the asset regularly
Disadvantages: the total cost leasing is usually higher than purchasing the asset
an asset instead instead of purchasing it, a business reduces the amount of finance it needs to raise
a form of log term loan to limited company
This involves 'selling' a debt (money owed to a firm by its debtors) to a debt factoring company. These companies give the firm a percentage of the debt and will then attempt to cover the full debt for themsevles.
Advantages: grants provide a cheap or free source of fund business do not usually have to pay back the grant
Disadvantage of grants: grants are often only available for specific type of business or specific area of a country
an available for businesses setting up in certain locations, producing certain products or for creating employment opportunities
Advantage: it may be one of the few sources of finance available to start up business
venture capitalists often offer management advice and consultancy as part of the loan
Disadvantages: firms have to share ownership and profit with the venture the venture capitalists venture capital is usually only available to high potential businesses with strong growth prospects.
specialist finance providers.
Disadvantages: 1.The firm may not receive 100% of the debt. 2. The riskier a debt is, the lower the percentage received.
Advantages: the firm gains a large injection of capital
the firm retains use of the asset
Advantages: 1.It provides business with quick access to funds. 2. The firm does not have to worry about collecting the debt (and avoids the full impact of bad debts).
Hire purchase is similar to leasing, but gives a firm the advantages of owning the asset once it has made all the monthly payment.
Disadvantages: the cost of leasing the asset back will be high the leasing arrangement may not include maintenance
Businesses use sale and leaseback to resolve short term cash flow crisis
Disadvantages: 1. The firm is usually responsible for maintenance(and replacement) of the asset. 2. The total cost of hire purchase is usually higher than the cost of purchasing the asset
Advantages: The firm owns the asset once all payments are made
Bank loans are usually repaid on a monthly basis over a number of years. The bank charges interest on the loan amount.
Disadvantages: 1.Depending on the interest rate and amount loaned, bank loans can be expensive. 2. Banks usually require some some from of security on the loan (a business building or, in the case of a sole trader, a personal asset such as a house)
Advantages: 1.Bank loans are quick and easy to arrange. 2.They can be arranged for different amounts and timeframes(periods).
A share issue is a way of generating large sums of money. Selling newly issued shares to investors raises more funds, but reduces the owners' stake in the business