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SOURCES OF FINANCE FOR A BUSINESS - Coggle Diagram
SOURCES OF FINANCE FOR A BUSINESS
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 business.
About 50% of profits usually retained.
EXTERNAL (EQUITY)
Ordinary shares
New Issue
- 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)
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 a debenture, but 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 investors invest 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- business never owns asset.
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 business to 'overdraw' bank account- similar to a credit card.
Assist with liquidity- very common method to help with cash flow issues.