Sources of Finance

• sources of finance:

  ways of obtaining the funds the business needs; money may be needed to meet short or long term needs
• short-term finance:

  helps a business maintain a positive cash flow
• what is one use of short-term finance related to seasonal sales?

  getting through seasonal sale loss (e.g., selling ice-creams in winter)
• how can short-term finance help when a large payment is delayed?

  bridges the gap
• what is one way short-term finance can provide extra cash for a specific purpose?

  providing for manufacturing requirements
• how can short-term finance help a business respond to unexpected changes?

  meeting unexpected changes in demand
• bank overdrafts:

  -variable interest rates

  -flexibility

  -banks can demand full repayment in 24 hours
• trade credit:

  the process of buying items from a supplier and paying for them later; for example, 30 days after invoice date
• terms and conditions of a credit agreement:

  -credit limit

  -credit period

  -frequency of payment

  -method of payment

  -retrospective discount (given when the business has purchased a certain amount of stock/raw materials)
• personal savings:

  money saved by an entrepreneur (no interest charges applied)
• venture capital:


  money invested by an individual or group that is willing to take the risk of funding a new business in exchange for an agreed share of the profits
• share capital:

  money raised by shareholders through the sale of ordinary shares
• advantages of share capital:

  -permanent capital (can't be refunded)

  -no dividends have to be paid if the business has a poor year
• dividends:

  a portion of the after-tax profit that is paid to shareholders according to the number of shares they own
• disadvantages of share capital:

  -dilutes control for the founders

  -the business is vulnerable to takeovers
• bank loan:

  money lent to an individual or business that is paid off with interest over an agreed period of time
• bank loan process:

  -application

  -credit checks

  -secure assets against loan
• retained profit:

  money made from profit that has been reinvested back into the business
• crowdfunding:

  a large number of people investing small amounts of money in a business, usually online
• advantages of crowdfunding:

  -form of market research

  -provides opportunities for less fortunate individuals
• disadvantages of crowdfunding:

  -must be interesting/appealing

  -difficult to reach the funding target