internal, external and long term sources of finance

• what is capital expenditure?


  money spent on buying fixed assets
• revenue expenditure


  spending money on goods and services that will be consumed in day-to-day operations
• what is the difference between working capital and revenue expenditure?

  working capital is the ACTUAL funds available to pay for day-to-day expenses

  
  

  - revenue expenditure is the amount spent on day-to-day expenses

  
  

  e.g. could have £50 working capital -> spend £40 as revenue expenditure
• what is internal and external sources of finance

  - internal - funds from within the business

  
  

  - external - funds from outside the business
• internal sources of finance

  - owner funds

  - retained profit

  - sale of assets
• benefits of using owners funds


  banks are willing to lend money if the owner has put their own money into the enterprise
• drawbacks of using owners funds

  - if the business fails, they will lose their investment

  - owner many not have enough funds to meet the business' needs
• benefits of selling assets

  - won't need to take loans or pay interest (already owns it)

  - sell unused goods (no loss)
• drawbacks of selling assets

  - items usually depreciate in value (enterprise could sell it for less than the bought it for)

  
  

  - could sell something it later needs
• external sources of finance

  - credit cards

  - overdraft

  - leasing
• advantages of overdraft

  - very quick to arrange

  - good short term solution to cash flow problems
• disadvantages of overdraft

  - often high interest rates

  
  

  - only suitable for small amounts

  
  

  - has to be repaid within short amount of time
• advantages of using credit cards

  - flexible
• disadvantages of credit cards

  - high rates of interest

  - limit on the amount of credit
• advantages of trade credit

  - gives the business more cash to use in the immediate future
• disadvantages of trade credit

  - can only be used to buy certain goods

  
  

  - bills usually have to be settle within 1 or 2 or 3 months
• start-up finance (internal)


  - borrowing from friends/ family

  - savings
• - bank loan

  - venture capital

  - bank overdraft
• what does expansion involve?

  - producing & selling more products

  - opening a new branch of the enterprise

  - moving into new markets
• example of moving to new markets

  branching out from LS12 to the whole of Leeds

  ( e.g. lacoste: from sportswear -> casual)
• what could an enterprise use to finance expansions

  retained profit
• advantages of using retained profit

  not borrowed = no paying back or interest
• disadvantages of using retained profit

  - risk of not having money in financial emergencies

  
  

  - new businesses may not have retained profits
• who is retained profits not shared among?

  shareholders
• is retained profits long term of short term finance? and why?

  long term - built up for years/months
• exam tip: retained profits


  if retained profit is lower than money needed, you can suggest using a combination of sources of finance e.g. bank loan
• long term sources of finance

  - bank loan

  - leasing equipment

  - venture capital

  - hire purchase

  - government grants

  - peer to peer lending
• is share capital long term or short term?


  long term
• who do banks only loan to?

  people of low risk

  - proof that they can pay it back (history or evidence of successful business)

  
  

  - young enough to pay back (won't die)
• what is leasing equipment?

  using expensive assets without having to buy them
• how does an enterprise pay for leasing equipment?

  pay in regular amounts to the business that owns it
• what does an enterprise do once it is finished with the equipment that it is leasing?

  return it

  WILL NEVER OWN IT
• what is a venture capital(ist)?

  someone that looks for business to invest in

  ​
• what does a venture capitalist offer?

  capital for an agreed percentage return on their investment
• what does a venture capital receive?

  a share of profits
• what may a venture capital have

  a say in key decisions
• what is a hire purchase?

  You use goods and pay in installments but goods

  - WILL BE YOURS once you pay it off
• disadvantages of hire purchase

  Miss the final payment and goods can be repossessed
• what are government grants?

  money given to selected businesses to support their growth and development

  
  

  DONT NEED TO BE PAID BACK
• Why are some government grants only available in certain areas of the country?

  - businesses in deprived areas may have no ambition and less chance of success than less deprived ones