Source of Finance

• Internal Sources of Finance are funds obtained from within the business

  Includes Owners Equity Retained Profit, and Sale of Unwanted Asset
• Owners Equity:

  • Funds contributed by owner’s / partners to establish and build the business
  • Can be raised by taking more partners, issuing private shares or selling assets
• Retained Profit:

  • Earnings kept inside the business to be reinvested
• Sale of Unwanted Asset
• External Sources of Finance are obtained from outside the business
• Short Term Borrowing Debt:

  • Funds borrowed paid within 12 months
• Overdraft(Short Term Borrowing):

  • Gives business flexibility to overborrow/go into negative value for short periods of time until money is paid back
  • Overdrafts are convenient but very expensive due to high daily interest
• Commercial Bills(Short Term Borrowing):

  • Written order for a loan amount guaranteed by the bank
  • Money borrowed from other businesses surplus who need funds short term to improve liquidity
  • Funds are paid back with interest at a certain date in the future, not through instalments
  • Usually 30-180 days, but can be longer
• Factoring(Short Term Borrowing):

  • Cash sale of businesses accounts receivable at a discounted price to a factoring company to receive funds quicker for an expense
  • Improves liquidity at the expense of current working capital
• Long Term Borrowing:

  • Debt with repayment over 12 months
• Mortgage(Long Term Borrowing):

  • Long term borrowing secured against a piece of land
  • Have long repayment terms
  • An entrepreneur may purchase non-current assets using a mortgage loan from a bank or business lenders for land such as factory sites, offices, or a building
  • Up to 30 years - LOW INTEREST
• Debenture(Long Term Borrowing)::

  • Long term loan where a promise/bond is made for a business to repay money loaned by an investor/bondholder with interest
  • Lenders have security of business assets
  • Normally large businesses go with Debentures as they have trust and reputation
  • Paid on the maturity date, no repayments
  • >10 years - LOW INTEREST
• Unsecured Notes(Long Term Borrowing)::

  • Loan from investors for a set period of time
  • Same as Debenture but do not have security on assets, therefore having higher interest
  • Regular repayments of interest, but loan amount paid on maturity
  • 3-10 years - HIGH INTEREST
• Leasing(Long Term Borrowing)::

  • Leasing non-current assets such as office, cars, equipment in return for payments to the owner
  • Reduces current cost to have assets but does not claim ownership
  • Lease payments are tax deductible
  • Does not affect gearing
• Term Loan(Long Term Borrowing)::

  • Loan with repayment over 12 months
• Equity:

  • Finance raised from the issuing of shares/ownership of the business
• Ordinary Shares:

  • Buying/acquiring part of ownership from a publicly listed company
• New Issues:

  • The first time offering a business’s stock on the ASX
  • Value decided by business when initially put into public
  • Very expensive/time-consuming as prospectus needs to be made
  • Aim to raise the most amount of money
  • Dilutes ownership
• Rights Issues:

  • Offering of shares to existing shareholders in proportion to currently owed amount
  • Raises less money as shares are at a lower price
  • Quicker and less time-consuming
• Placements:

  • Offering shares to NEW specific institutions and investors
  • Allows specific investors to be targeted
  • Dilutes ownership
• Share Purchase Plan:

  • Allows business to issue a maximum of 15000 in shares to each existing shareholder
  • Gives existing holders a convenient means of obtaining additional shares or interests in the issuer
  • Shares are priced at a discount to the market price during a period before the offer and without brokerage fees
  • Quick and relatively inexpensive way to raise extra share capital
  • Dilutes ownership
• Private Equity:

  • Money invested in a Private Company by select investors
  • Dilutes ownership
• Long Term Debt Financing includes

  Mortgage

  Debentures

  Unsecured Loans

  Leasing

  Term Loan
• Short term debt financing includes

  Overdraft

  Commercial

  Factoring