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Introduction to finance and sources of finance - Coggle Diagram
Introduction to finance and sources of finance
Key terms
Capital expenditure
Capital expenditure refers to investment spending on fixed assets, such as the purchase of machinery, equipment, land and buildings.
Fixed asset
Fixed assets (or non-current assets) are items of monetary value that have a long-term function for businesses, so can be used repeatedly for the purpose of production.
Revenue expenditure
Revenue expenditure refers to spending on the day-to-day running of a business, such as payment of rent, wages, salaries and utility bills.
Internal sources of finance
Funds that come from within the business without any external help
Personal funds
Use of an entrepreneur's own savings
Disadvantage
high risk
rarely sufficient .
Many entrepreneurs risk their entire life savings in a business venture.
Advantages
not need to be repaid.
There are no interest charges
better chance of being able to borrow money it shows greater commitment to the business venture.
the cheaper option
Retained profit
comes from having a financial surplus
Disadvantage
Start-up business don’t have any retained profit
Retained profit is rarely enough
Using the funds as retained profits for use to grow the business means there is less dividends paid out to shareholders and owners of the business.
Advantages
No interest charge
Not need to be repaid
great flexibility
Sale of assets
sale their dormant assets
Disadvantage
can hinder a firm’s productive capacity.
It can be very time consuming to find a suitable buyer for second-hand assets,
The option of asset sales is only available to established businesses
Advantage
A large sum of money can be raised.
sensible way for a business to raise finance.
there are no costs of borrowing
External sources of finance
refer to money that come from outside the business.
Share capital
finance raised through the issuing of shares via a stock exchange
Advantages
no need to be repaid.
provide significant funding
not involve debt nor does in incur interest repayments.
It improves the company's gearing (its debt to equity ratio).
Disadvantages
be paid dividends if the company earns a profit.
ownership existing shareholders may be diluted.
The costs of issuing shares can be expensive
Loan capital
borrowed funds from financial lenders
Advantages
more accessible and affordable
able to negotiate a lower rate of interest
need to raise finance but do not want to dilute their ownership
disadvantages
Interest is charged
businesses have to offer collateral (security) before loans can be approved.
may suffer from liquidity problems
Overdrafts
banking service that enables customers to withdraw more money from their account than exists in the account.
Advantages
easy to obtain.
emergency funds .
great flexibility
Disadvantages
High interest rate
only lend a small amount
can ask for overdrafts to be repaid at very short notice.
Trade credit
enables a customer to purchase and obtain goods and services but to pay for these at a later date
advantage
Interest-free short-term finance
Improves cash flow (delays payment)
Quick access without formal application
No collateral required
disadvantage
Short repayment period
Supplier pressure or reduced trust if late
May lose early payment discounts
Can damage credit rating if misused
Crowdfunding
involves raising small amounts of money from a large number of people to fund a particular business project
Advantages
limits the risks and impacts
Time saving
Large amount of finance
Not lose of control
less costly.
Disadvantage
Uncertain success (no guarantee of full funding)
Requires strong promotion and pitch
Can be time-consuming to manage
Leasing
drawing up a contract with the leasing company to use particular non-current assets for an agreed fee
Advantage
No large upfront cost (preserves cash)
Easier budgeting with fixed payments
Access to latest assets/technology
Disadvantages :
No ownership at the end (unless buyout option)
ore expensive long-term than buying
Microfinance providers
For-profit social enterprises that offer a financial service to those without a job
Advantages
Accessible to small/start-up businesses
Encourages entrepreneurship
No collateral typically required
Disadvantages
Accessible to small/start-up businesses
Encourages entrepreneurship
No collateral typically required
Business angels
are wealthy and successful private individuals who risk their own money in a business venture that has high growth potential.
Advantages
Access to capital for start-ups
Mentorship and expertise from experienced investors
Flexible terms compared to banks
disadvantages
Loss of ownership (equity is given up)
May lose control over business decisions
Limited availability (hard to find the right angel)
Short terms sources of finance
Personal savings
Sale of assets
Overdrafts
Trade credit
Long term sources of finance
Share capital
Loan capital, such as mortgages
Leasing
Business angels
Microfinance providers
Crowdfunding