Please enable JavaScript.
Coggle requires JavaScript to display documents.
sources of finance - Coggle Diagram
sources of finance
Retained profits (internal finance)
These are profits kept and used to invest in the company
+
no interests charges
+
available immediately
+
no loss of ownership (control)
+
Only available up to the amount accumulated by the business and therefore avoids debts
-
amount available may be limited
-
reduces payments to shareholders which may cause dissatisfaction
-
once used it is noy availible for alternative purposes
loans (external finance)
a specific sum of money is borrowed for a fixed time period
+
regular pre-agreed repayments make planning and budgeting relatively easy
+
Ownership or control is not lost
-
Interest is charged on the amount borrowed
-
Interests rates can fluctuate
-
often secured against an asset which can be seized if payments are missed.
-
Interest has to be paid regardless of whether a payment is being made
Mortgages (external finance)
these are loans for the purchase of land or buildings. the business has longer to pay back the loan (20-35 years). the land or buildings are security for the loan.
+
large amounts of finance can be raised and repaid over a prolonged period of time
+
ownership or control is not lost
-
interest is charged on the amount borrowed
-
interests rates can fluctuate
-
Not suitable for small amounts or as a short-term source of finance
-
Interest has to be paid regardless of whether a profit is being made
Sale of assets (Internal finance)
assets (e.g machinery) is sold to raise finance
+
no interest charged
+
reduces capital tied up in assets, releasung ut for other purposes
+
can mean disposing of an asset no longer of use to the business
-
it is likely that the amount received is not a true reflection of the value of the asset
-
Can increase costs in the long run if an asset needs to be leased back
owners capital (external finance)
capital introduced into the firm by the owner
+
No interest payments or need to repay.
+
High level of commitment from the owner
-
amount available is likely to be limited
-
If there is more than one owner this could cause friction if everyone is not able to contribute the same amount
Crowd-funding (external finance)
this involves raising money through the internet to attract investors
+
offers the ability to raise finance from large numbers of investors.
+
No interest is paid as inventors will only be rewarded if the business is successfully sold on at a later date
-
partails loss of ownership
-
No guarantee that the crowd fund will attract sufficient investment to meet the proposal
Net current assets (internal finance)
This is the money availible in the business to fund the day-to-day expenditure.
+
encourages the business to manage cash flow effectively
-
can put pressure on customers as shorter credit terms are offered and this negatively affects relationships with supplies if longer credit terms are negotiated.
-
lower stock holdings can affect the firms ability to meet customers needs
Venture capital (external finance)
+
fiance is provided by a business professional who will often offer advice and mentoring alongside the investment
+
venture capitalists are often risk takers and may see the potential in a high risk investment that other investors including banks will not be willing to invest in.
-
partial loss of ownership and control
-
conflict can arise between the entrepreneur and venture capitalist regarding the direction and day-to-day running of the business
Grants (external finance)
+
No need to repay and no interest charges
+
No loss of ownership of control
-
often require a lengthy application process
-
might only be awarded if certain conditions are met affecting the way the business operates on a day-to-day basis