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sources of finance - Coggle Diagram

- - - - eg: obsolete machinery
- - - - business development loans
        
        highly flexible, catered to specific needs of borrower to develop aspects of business
        
        used for a range of purposes
        
        starting up, expanding, purchase assets, improve cash flow
      - mortgages
        
        secured loans for purchase of property such as land or buildings
        
        if borrower defaults on loan (fails to repay) lender can reclaim property
      - debentures
        
        long term loans issues by business
        
        debenture holders receive interests even if the business is making a loss and before dividends
        
        interest can be fixed or variable
        
        debenture holders do not have ownership or voting rights
        
        long term source of finance without losing control
        
        increases gearing ratio as business has more percentage of borrowing of its total capital employed
        
        more vulnerable to risk if interest rates increase
  - - - commonly used when there are minor cash flow problems
        
        most flexible form of borrowing
        in the short term
      - demand relatively high rates of interest but are the most cost effective
        
        used only on short term basis, interest is charged on daily and only if money is OVERDRAWN
      - suitable when there is a need of a large cash outflow
        
        or for businesses who have sold products on trade credit and are awaiting payment
  - - - depends on traditional network of friends and family
        
        usually results in some loss of control as investors demand shares
    - - there may be a hosting charge
        
        the more innovative and creative the idea, the more likely crowdfunding can be used
    - - to protect donors from fraudulent activity
  - - - lessee pays rental income to hire assets from lessor who is the legal owner of the assets
        
        repairs and maintenance is lessor's responsibility
        
        classed as an expense so it reduces tax bill of lessee
      - suitable for businesses that do not have the initial capital to purchase assets
        
        releases cash for other suitable purposes
      - in long term, leasing is more expensive than purchasing the asset
      - types:
        
        sales and leaseback: involves a business selling a particular asset and immediately leasing it back -- ownership is transferred but asset does not physically leave the business
        
        hire purchase: allows business to pay creditors in instalments. asset is legally the property of the creditor until all payments have been made
        
        deposit made to secure HP
        
        if buyer defaults on payments, lender can repossess asset
  - - - high risk, high return
    - - owner loses some control
      - expertise and experience can be valuable for success and survival of the business
      - assess certain criteria before committing their own funds
        
        return on investment
        
        business plan
        
        people
        
        track record
  - - - IPO: businesses go public by floating their shares on stock exchange for sale for the first time
      - existing publicly held companies can sell more shares in share issue on stock exchange
        
        control is diluted
        
        more legalities and administrative procedures
        
        increased costs
  - - - debtors - the customers