Finance-source, cost

• Debt finance

  Relates to the short-term and long-term borrowing from external sources by a business. 

  Advantage: 

  • The main advantage of debt finance is the owner does not have to sell any ownership into the business (no delusion of ownership-bringing on more owners). As well as certain taxation advantages. 
  • Long-term debt finance=Greater than one year  
  • Short-term debt finance (working capital)=Less than one year 
• Short term debt finance

  An overdraft is when the bank allows a business to overdraw their account up to an agreed limit for a specified time to overcome a temporary cash shortfall. 

  Commercial-bills are primarily short-term loans issued by financial institutions for larger amounts (usually over $100 000) for a period of generally between 30 and 180 days

  Factoring refers to the selling of accounts receivable for a discounted price to a finance or factoring company.

  • Get your money now 
  • But factor’s take some of that money 
• Long term debt finance

  A mortgage is a loan secured by the property of the borrower (business)

  Debentures are issued by a company for a fixed rate of interest and for a fixed period of time. 

  • Usually secured against assets. 
  • For example if they buy new machinery, expensive research. 

  An unsecured note is a loan from investors for a set period of time. It is not secured against the business’s assets.

  • Taking a chance, higher rate of interest, bigger risk 
• Equity finance

  Equity finance refers to the funds contributed by the business owner(s) to start and then expand the business. 

  Advantages 

  • Does not have to be repaid unless the owner leaves the business 
  • No interest payments, business retains control over how finance is used. 

  Disadvantages 

  • Owner may expect a good return of control over how finance is used. 
  • The small amount of finance may generate only low profits and low returns
• Equity finance types

  Self-funding

  is when the owners use their own money to fund the business. This is shown on the balance sheet as “owners capital”. 

  Family or friends 

  May put some of their money into the business and may or may not expect a share of the profit in return.  
• Equity finance types

  Private investors 

  May contribute funds but will expect a share of the profits as a return. Private investors have a share in the equity of the firm. 

  Shares 

  Private shares may be issued by a private company. Shares to the general public may be issued in an “initial public offering” on the ASX for a company wishing to ‘go public’ or ‘float’ shareholders will expect a dividend.  

  Crowd-funding 

  May contribute funds but will expect a share of the profits as a return. Private investors have a share in the equity of the firm. 
• Assets

  Assets are items of value owned by the business that can be given a monetary (money) value. 
• Current assets

  Current assets are assets that a business can expect to use up, or turn over within the period of 12 months. (e.g cash, accounts receivable (debtors), and inventories (stock). 

  Debtors are people who owe the business money (current assets) 
• Non-current assets

  Non-current assets are those assets that have an expected life of longer than 12 months. These include large physical items such as buildings, land, machinery, technology, vehicles, furniture , fixtures and fittings. 
• Liabilities

  Liabilities are items of debt owed to other organisations/parties (e.g suppliers, banks) and include  loans, accounts to be paid by the business, mortgages, credit card and accumulated expenses. 
• Current liabilities

  Current liabilities are those in which the debt is expected to be repaid in the short term (12 months or less) and include bank overdrafts, credit card debts, accounts payable (creditors) and accrued expenses.  

  Creditors are people who owe money to the business (current liabilities) 
• Non-current liabilities

  Non-current liabilities  are long-term debt items such as mortgages, leases, debentures, and retirement benefit funds (money owed to employees upon retirement from the business). Some of these non-current can last up to 30 years. 
• Accounting equation

  Assets=liabilities + owners equity
• Gross profit

  =revenue-COGS
• COGS

  =OS + P - CS
• Net profit

  = gross profit - expenses