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Sources of Finance for Businesses - Coggle Diagram
Sources of Finance for Businesses
INTERNAL
(equity)
Owners Equity
Funds contributed by owners
Funds can also come from partners or issue of private shares
Retained Profits
Keep profits / earning from businesses
About 50% of profits usually retained
EXTERNAL
(equity)
Ordinary shares
News Issues
- IPO
Company becomes 'public' - floated on ASX
Investors can vote at AGM and receive dividends (profits)
Original business owners lose some control
Rights Issue
- New shares, that only existing shareholders can buy
Placements
- Private sale of shares to specific investor - not open to the public
Share purchase Plans
- Existing shareholders can buy new shares at a reduced cost - limited to $15,000
Private equity
Offers shares in the company, but remains private
Only selected investors can invest - it is not 'public'
Usually done to fund expansion
EXTERNAL
(debt)
SHORT TERM
Factoring
Raise funds quickly by selling accounts receivable to a factoring company
Receive around 80% of the total value
Commercial Bills
short term loan for larger amounts - $100k
Business receives sum immediately
Repaid in full (with interest) at end of loan period
Secured against the business assets
Overdraft
Allow businesses to 'overdraw' ban account - similar to a credit card
Assist with liquidity - very common method to hep with cash flow issues
LONG TERM
Mortgage
Secured against assets of business (usually property)
Usually for a new premises, factory or office
Repaid with interest over a long period of time
Unsecured notes
Similar to debenture, nut not secured by the company's assets
Because more risk, the business must offer investors a higher rate of interest to attract them
Debentures
Issued by a large public company to general investors
The investor invests for a fixed period of time at a fixed interest rate
Secured against the assets of the business - lowers risk
Investor has no ownership of business - gets same interest rate regardless of company performance
Leasing
Allows the business to use (rent) an asset for a fixed period of time
Typically used for cars, computers and office equipment
Financial lease - longer period of time - business owns the asset at the end
Operational lease - shorter period of time p business never owns asset