5.2

    Cards (40)

    • Internal sources of finance
      • Retained earnings
      • Owners own savings or investments
      • Sale of unwanted assets
      • Sale and lease back
      • Working Capital
    • Retained earnings

      The profit that a business keeps after taxes are paid to the government and dividends are paid to the shareholders
    • Retained earnings

      • Only available to firms making a profit over a period of time
      • Profits may not be sufficient to purchase expensive non-current assets
    • Savings from the owner
      Finance raised by using the business owner's savings for additional capital when needed
    • Savings from the owner
      • There is no interest on savings and the money does not need to be repaid
      • Available quickly as owners can often provide the money fast
      • The amount of savings can be limited
      • There is a risk for the owners that they may lose their money
    • Sale of unwanted assets
      Finance raised by a business selling some of its assets that it no longer needs
    • Sale of unwanted assets
      • Allows the business to use the capital instead of having it tied up in assets
      • It does not add to the business's debt as the assets are owned by the business
      • The business can get money fast
      • Small businesses may not have many assets to sell
      • An asset might be sold for less than its real value and it may take time to sell it
    • Sale and leaseback of non-current assets

      Firms sell valuable assets and lease them back again
    • Sale and leaseback of non-current assets
      • The business has the capital from the sale of the assets as well as the continuing use of these assets so the so that their business is not disrupted
      • The business now has to pay for the use of assets which previously were freely available, which may have a negative impact on the long term profits
    • Working capital
      The cash needed by your business to pay for its day-to-day operations
    • Working capital
      • Reducing inventory levels, chasing customers for payment more urgently and delaying payments to suppliers can raise cash to improve a firm's working capital
      • Firms might seek to improve terms that they are offered for their trade payables - they might try to extend the pay-back period
      • Although the receipt of trade credit is a means of improving the company's working capital it is technically an external source of finance
    • External sources of finance

      • Share capital
      • Bank overdrafts
      • Trade credit
      • Leasing and higher purchase
      • Bank loans
      • Mortgages
      • Venture capital
      • Debentures
      • Debt factoring
      • Microfinance
      • Crowdfunding
      • Government grants
      • New partners
    • Share capital

      Limited companies are able to raise finance by issuing new shares
    • Share capital
      • Large sums of money can be raised when a company sells shares to the public
      • There is no interest and the money does not have to be repaid to the shareholders
      • You lose a part of your business
    • Bank overdrafts

      When the bank allows you to withdraw more money than what's in your account, has to be repaid with interest
    • Bank overdrafts

      • Easy and quick
      • Expensive
    • Trade credit
      A type of arrangement where a buyer is allowed to purchase goods or services from a supplier on credit, meaning they receive the goods now and pay for them later
    • Trade credit
      • It's a common practice in business transactions where suppliers extend credit terms to their customers, enabling them to manage cash flow and procure necessary goods or services without immediate payment
      • In effect, it's like an interest free loan
    • Leasing
      Getting to use a non-current asset (machine, equipment etc) where, instead of paying for all of it at the same time, a business pays a fixed amount of money each week or month for the asset
    • Leasing
      • The business can use the money for other things instead of spending a large sum on a fixed asset
      • If something happens to the product the leasing company will give the business a new one
      • The business will get an updated model every few years
      • The business never owns the asset
      • The business will probably end up paying more over the years than if they had bought the asset
    • Hire purchase
      Purchasing non-current assets (machine, equipment etc) where, instead of paying for all of it at the same time, a business pays a fixed amount of money each week or month for the asset
    • Hire purchase
      • The business can use the money for other things instead of spending a large sum on a fixed asset
      • Expensive - you have to pay interest
      • You end up paying more for the asset
    • Bank loans

      Businesses can raise finance by borrowing money from a bank
    • Bank loans
      • Easy to get large sums of money quickly
      • You have to pay back with interest
      • The bank may ask for security for giving the loan (your house etc)
    • Mortgage
      Same as bank loan but used when buying a house or any type of property or land
    • Mortgage
      • The bank will use the property you buy as security (collateral) and if you don't pay it back you could end up losing the property
      • Businesses may choose to remortgage their premises to raise capital
    • Venture capital
      Money given to new or small companies by investors who hope to get back more money than they invested
    • Venture capital
      • Venture capitalists invest in companies in exchange for an ownership stake in the business
      • Venture capital investments are inherently risky because startups have a high likelihood of failure
      • Venture capitalists often offer expertise, guidance, industry connections, and support to help startups grow and succeed
      • A disadvantage is that the venture capitalist will take a percentage of the business
    • Debenture
      A special type of long term loan to be repaid at some future date normally within 15 years of the loan being agreed
    • Debenture
      • The rate of interest paid on a debenture is fixed
      • The business will usually provide security to make sure that the get their money back
    • Debt factoring

      A service offered by banks and other financial institutions where businesses can raise finance by selling their debt to a debt factoring company
    • Debt factoring
      • Businesses can get rid of unpaid debts and get back most of the money owed to them by the debtors
      • Most of the money can be got hold of quickly
      • They don't get all their money back
    • Microfinance

      Small amount of capital loaned to a business when it's difficult for them to get finance from a normal bank
    • Microfinance

      • Common in countries where business capital is difficult to obtain
      • These loans are usually paid back after a short period of time and usually with a high interest rate
      • Easy to get, when other banks won't give the money
      • Expensive, high interest rates
    • Crowdfunding

      Source of finance that involves collecting relatively small amounts of money from a large number of supporters and backers
    • Crowdfunding
      • Crowdfunding in a business context usually involves members of the crowd each lending a small sum of money to the business
      • Crowdfunding is attractive for businesses as it avoids the need to deal with local banks which can be bureaucratic and slow to make decisions
    • Government grants
      Money provided by the government to businesses that the government considers beneficial for the economy
    • Government grants

      • The money does not need to be paid back and does not incur interest
      • The money is usually provided with certain conditions, such as relocating in an area with high unemployment
      • The money is only available to certain types of businesses, and this depends on the priorities of the government
    • New partners

      Businesses can raise finance by taking on new partners
    • Factors influencing the choice of finance
      • Size and legal form of business
      • Amount required
      • Need to retain control
      • Cost of the source of finance
      • Existing borrowing