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Sources of finance - Coggle Diagram
Sources of finance
INternal sources of finance
Finance that comes within the business
Owner's capital / personal savings
Owners introduce their own sacings as funds to develop the business
Retained profit
The profit that has been generated in previous years and not distributed to owners is reinvested back into the business
involves no interest, but has opportunity cost
Sale of assets
Selling assets which are no longer required
Evalutaion
Advantages
Does not involve third parties who might want to influence business decisions
Internal finance is free invlves no interest
Disadvantages
Significant opportunity cost involved for the business
INternal finance might not allways e sufficient
External sources of finance
Finance which comes from outside the business
Main types of external souces of finance
Share capital
Finance raised from the sale of shares of the limited company through flotation or a rights issue
Shareholders are the owners of shares and they are entitled to a share of the company’s profit when dividends are declared
loans
typically available to large businesses and repaid in between 5 and 20 years
Money given by an entity (normally abank) which needs to be returned later with interest
mortages
long term secured loans
a secure loan requires the borrower to provide the lender with an asset that will be used as a colllaeral against the loan
Overdrafts
This is an arrangement between the business and their bank to spend more money than it has in its account
short term source of ifnance
Trade credit
An agreement is made with suppliers to buy raw materials, components and stock, which are then paid for at a later date, typically 30 to 90 days later
Usually interest fre and more common with large businesses
Leasing
Assets such as machinery or a fleet of vehicles are made available to the business in return for regular payments (a form of rental)
The business does not own the asset during the period of the lease and is not responsable for maintenance or repair costs
Crowdfunding
Crowdfunding allows businesses to access finance provided by a large number of small investors on online platforms such as Kickstarter
Microfinance providers
Micro-finance providers are small lenders who make finance directly available to individuals or businesses who would be unable to access finance from anywhere else
Consider to be more risky than loans
Useful for businesses that might not qualify for other sources of funding and have few formalities involved
Business angels
Some individuals specialise in making investments in start-up or expanding businesse
more willing to take risks than banks
As business angels own a stake in the business, they may be involved in decision-making and will receive a share of business profits
The best choice for finance
actors affecting choice of finance
cost
Interest payable on loans can add a significant cost to the use of some sources of finance
Type of interest rates
fixed interest rate
remain constant for the period of time the loan
variable interest rates
change during the borrowing term
Purpose of finance
A mortgage is the most appropriate type of lending to purchase land or property
Overdrafts are flexible and are best used for short-term working capital requirements
legal structure
Sole traders, partnerships and small private limited companies usually have a more limited range of sources of finance as they are seen as having a greater lending risk
Contol
Selling shares or raising venture capital can result in some loss of control for business owners
timescale
Short-term sources of finance will be needed to meet unexpected costs or to pay bills and suppliers
Longer-term sources of finance will be needed to fund the purchase of non-current assets such as buildings and other types of capital equipment
short term sources of finance
trade credit
overdraft
long term sources of finance
bank loans
retained profit
share capital
crowd funding
Level of existing debt