Sources of Finance

Internal sources

personal funds, retained profits, sales of assets

Personal funds

Primary source of finance. Uses are capital and revenue expenditure. → long-term

adv & dis of personal funds

Adv: zero cost of finance → no interest, no need to repay, total control over business, all profits come back to you 

Dis: amount available is limited to the size of savings owned by the sole trader

Retained profits

This is the value of finance that the business keeps after paying taxes to the government and dividends to its shareholders to use within the business. There are the savings earned by the business → long term

adv & dis of retained profits

• Adv: zero cost of finance (as there are no interest charge), more control 

• Dis: If the business makes a loss, this source of finance is not available. If shareholders are paid high dividends, there will not be much retained profit leftover to be reinvested to the business. Money is limited

sales of assets

 Businesses can sell their unused assets to raise finance. This includes old machinery, computer equipment that has been replaced, land, buildings. Use for capital expenditure and sometimes revenue → ONLY IN LIQUIDITY CRISIS

adv & dis of sale of assets

ADV: zero cost of finance 

DIS: if assets are undesirable, there is no demand → funds cannot be raised / assets are limited 

external sources of finance (8)

share capital, loan capital, overdraft, trade credit, crowdfunding, leasing, microfinance, business angels,

share capital

Main source of finance for most limited liability companies and acts as revenue expenditure Long term finance → Private limited companies cannot sell their shares to the general public. Existing public limited companies can raise finance by issuing even more shares, known as share issues. long-term unethical bc earn profits from low-income individuals and househands, small-scale finance, high interest charges so expensive for small businessses, low profitability --> struggle to attract valuable stakehodlers 

adv & dis of share capital

Adv: Can raise a huge amount of finance, especially for public limited companies,Offering equity as part of compensation can attract talented employees and provide them with financial gains if the company goes public.

DIS: Time consuming and expensive to prepare and launch, No guarantee that investors will be interested in buying shares.

Market sentiment

 the general attitude of investors towards a financial market or asset class. It can be optimistic (bullish), pessimistic (bearish), or neutral.

Loan capital

 Are obtained from commercial lending institutions such as banks. Medium to long-term finance. Interest is charged for the loan and the amount borrowed is repaid in instalments over a fixed period

adv & dis of loan capital

ADV: repayment by instalments gives businesses time to earn revenue so they can repay the loan. If you’re credible → you have a lower interest rate

DIS: depending on the interest rate, cost of borrowing may be high. If collateral is provided and the business fails, the lender takes possession of the asset

Overdraft

financial service that allows a business to temporarily overdraw on its bank account. Commonly used when businesses have minor cash flow problems.

adv & dis of overdraft

ADV: 

• most flexible form of borrowing for most businesses in the short-term. 

• More cost-effective than bank loans since it is used as a short-term source and interest is charged on a daily basis if a business overdraws on its account.

DIS:

• Interest is charged on the amount overdrawn, usually at rates higher than those charged for ordinary bank loans.

• Banks usually only lend a small amount of money, in order to keep a business operation; it is not a suitable for purchasing non-current assets, for example.

Trade credit

a type of commercial financing in which a customer is allowed to purchase goods or services and pay the supplier at a later scheduled date.

dis and adv of trade credit

• Trade credit can be an important external source of finance for businesses struggling with cash flow. 

• Buying goods and services on trade credit does not incur any interest charges if the amount owed is paid in full within the trade credit period.

Crowdfunding

 Involves raising small amounts of money from a large number of people to fund a particular business project or venture.

Equity crowdfunding

involves the sale of a stake in a business to a number of investors in the crowd.

Donation-based crowd funding

individuals donate small amounts of money to help fund a specific charitable project while receiving no financial stake or return for doing so.

adv & dis of crowdfunding

ADV: lends small amount of money --> limit risks No controlling interest in the organization Les costly than being listed on stock exchange

Dis: dis: legal challenges such as transparent disclcure of legal documents, be due diligence which can prolong decision making

leasing

 the business or customer (the lessee) drawing up a contract with the leasing company ( the lessor) to use particular non-current assets for an agreed fee. Leasing enables a business to use these assets without having to purchase them outright —> long term

adv & dis of leasing

adv: lessee does not have to purchase the expensive equipment. Money can be used for revenue expenditure purposes. Lessors takes responsibility for the maintenance

dis: lessee never owns the asset. leasing can be more expensive than buying the asset --> costly

microfinance

for-profit social enterprises that offer a financial service to those without a job or on very low incomes. These members of society would not ordinarily be able to secure bank loans.--> to help entrepreneurs, —> longterm

adv & dis of microfinance

adv: help people get out of poverty, create benefits for the wider community, acts in a socially responsible way

dis: unethical bc earn profits from low-income individuals and househands, small-scale finance, high interest charges so expensive for small businessses, low profitability --> struggle to attract valuable stakehodlers

Business angels

wealthy and successful private individuals who risk their own money in a business venture that has high growth potential / longterm

adv and dis of business angels

essential source for startups, useful for inexperienced entrepreneurs

dis: high rish --> losing personal money, lose control, no guarantees that angel investors will earn sastifactory ROI

short term

sources of finance needed for the day-to-day running of a business, ts revenue expenditure. --> cash flow

long term

more than one year from the balance sheet date. Mainly used for fixed assets --> capital expenditure