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Business finance - Coggle Diagram
Business finance
Sources of finance
External
sources outside the business
short-term finance
used to fund revenue expenditure, usually repaid within a year
overdrafts
short term bank loan used to cover cash shortage
advantages
cheaper than a bank loan
disadvantages
bank charge high interest rates and fees
trade credit
a business does not pay immeadiatly for goods it purchases
advantages
interest-free and easily available
early payment discount if accounts are paid before deadline
disadvantages
start-ups/young firms have to prove their ability to pay
carefully managed to avoid overtrading and cash flow crisis
long-term finance
used to fund capital expenditure, ususallyrepaid over a period longer than one year
debt factoring
‘selling’ a debt (money owed to a firm by its debtors) and give the firm a percentage
advantage
quick access to funds
not worrying to collecting the debt
disadvantage
firm may not receive 100% of the debt
the riskier the debt is, the lower the percentage received
leasing (hiring)
pays a set fee to lease an asset for a period of time, renew leasing contract to receive a new asset, leasing companies maintain and replace the asset if damaged
advantages
lower initial capital requirement
spreads the impact on cash flow
firm can replace the asset regularly
disadvantages
cost is usually higher than purchasing the asset
hire purchase
gives the asset once the monthly payments have been made
advantages
firm owns the asset once all payments are made
disadvantages
firm is responsible for maintenance of the asset
total cost is higher than the cost of purchasing the asse
bank loans
charges interest on the loan amount
advantages
quickly and easy to arrange
arranged for different amounts and timeframes
disadvantages
expensive depending on interest rate and amount loaned
require security on the loan
reposse asset if not payed
sale and leaseback
business sells an asset and eases it back from its new owner
advantages
large injection of capital
retains use of the asset
disadvantages
cost of leasing the asset back will be high
leasing arrangement may not include maintenance
Venture capital
loan money in return for a share of business ownership/share of profit
advantages
available to a start-up business
management advice and consultancy as part of the loan
disadvantage
share ownership and profit with the venture capitalists
only available to high-potential businesses with strong growth prospects
debentures
form of long-term loan to a limited company
advantages
interest may be cheaper than bank loans
disadvantages
only available to large limited companies
grant
offered by the government
advantages
cheap or free source
disadvantages
only available for specific types of business
Other
joint ventures
two or more business join to finance new
franchising
initial fee and share of profits
franchisor allows to use its brand & products
share issue
way of generating large sums of money
change in business status
raising funds and spreading the risk of ownership
new ideas and input
risk losing control of the business
takes time and can be expensive
crowd-sources financing
utilises the social power of the internet
micro-financing
allows people on very low incomes to borrow small amounts of money with out security
Internal
obtained within the business
owners fund
sole trader or members of a partnership may inject more of their own money into a business
advantages
quick, interest-free source of funds
disadvantages
greater financial risk for the owner
retained profit
use its own profit "ploughing back"
advantages
interest-free source of funds
disadvantages
not always available
owners receive less reward for their risk
working capital
reducing stocks, delaying payment to creditors
advantages
efficient management of cash is good business practice
disadvantages
money is not always available
ensure sufficient stock to meet demand
sale of assets
advantages
can enable business to release large sums of money
disadvantages
firm loses use of assets
finance is only available if an asset can be sold