Business & Management SOURCES OF BUSINESS FINANCE Why is there a need for finance in a business?

Setting up Expansion Day to Day running

Sources of Finance

Factors to consider before opting for a specific type of finance: Size of the business Purpose for which the finance is needed (e.g solving a short term cash flow problem will not require the same source of funding as for an expansion plan) Amount required Time scale (long term, medium term or short term)

Difference between Capital Expenditure and Revenue Expenditure Capital Expenditure: Spending on the purchase of fixed assets Revenue Expenditure: Spending on the day to day running of a business INTERNAL SOURCES OF BUSINESS FINANCE Personal Funds Family & Friends Working Capital (Money available for the day to day running of a business: Current Assets Current Liabilities) Retained Profits: Final profit of a limited company, left after payment of corporation tax to the government and payment of dividends to shareholders) Sale of fixed assets (E.g Idle, unproductive, unused fixed assets) EXTERNAL SOURCES OF BUSINESS FINANCE Share Capital: Money raised by sale of shares. For Ltd., shares are sold to private members whereas for plc, shares are listed on the stock exchange and sold to the general public. o Note: 2 types of shareholders Preference Shareholders- Paid dividends before everyone but get a fixed amount Ordinary Shareholders- Paid after preference shareholders but get dividends based on profits of the company. Loans: Long term borrowing from the bank which has to be paid back for a specified period of time and carries a rate on interest. o Mortgage- A loan where the borrowers property is used as collateral (security) in case he cannot pay back. The property might be seized in case of non-payment of the loan.

Gooroochurn Kentish

kentishgooroochurn@yahoo.com

Business & Management

Sources of Finance

Overdrafts: Short term facility provided by banks to businesses facing short term cash flow problems. It is when they are allowed to withdraw more money from their account than there is in it. Used for short term source of financing only. Overdrafts carry a higher rate of interest than bank loans. Government Grants: Provided by the government to facilitate business start ups and stimulate business activity for specific sectors. However, this is very hard to obtain and depends on the government policies. Government Subsidies: This is an assistance provided by the government to assist producers for certain types of businesses. It is done to reduce the cost of production so that customers can benefit from lower prices. Donations Sponsorship: Provision of money by one organization to a business and expects the latter to display their organisations brand/logo/name in return for activities undertaken by the business. Debt factoring: Agents paying outstanding sums of money owed to businesses by debtors. They provide 80 to 85 % of the outstanding finance immediately. In return, debtors have to pay them back instead of paying the business. The debtor has to pay the sum plus additional fees. However, if debtors do not pay the remaining 20 % of the debt, the business has to absorb the bad debts. o Non-Recourse Factoring: The debt factor absorbs the bad debts instead of the business. Leasing: Hiring assets to another business which will pay every month, generating finance for the business. o Lessor: The business offering the asset o Lessee: The business taking the asset on rent Debentures: Sold to the public which offers money and the business issues a certificate of acknowledgement of debt. Debenture holders do not have any voting rights nor can they take any decision about management of the business. They receive interest before all shareholders. Venture Capital: Money invested in a business by venture capitalists who perceive the ideas of the business worth enough to generate high potential profits. Business Angels: Informal and very affluent investor who provides capital for business startups. They are highly experienced and might exercise control to a certain extent on the business. When profits are generated, the business will have to pay them back.

Gooroochurn Kentish

kentishgooroochurn@yahoo.com