3.5.3 Making financial decisions: Sources of finance

External finance

External finance is investment for the business that is obtained from; banks, investors and lenders outside of the business

Internal Finance

Internal finance is money gained from inside the business for
example: owner's savings

#1 Debt factoring

customers owe money to the business, selling debts to other businesses who collect on behalf

#1 Debt factoring pros

-improves the cash flow
-frees up fiance department
-useful fr small business who don't have resources

#1 Debt factoring cons

-results in lower profit figure as full amount never achieved
-damage reputation
-company accounts look less attractive

#1 Debt factoring short term use

swap debt for cash to improve the working capital in a business to pay day to day

#1 Debt factoring long term use

reduce the cost of chasing debts long term

#2 Overdrafts

short term to help it survive may need extra cash

#2 Overdrafts pros

-quick fix
-instant decision
-pay interest on amount withdrawn no more
-easy to pay back

#2 Overdrafts cons

-if amount goes over it is unauthorized and there will be a charge
-can be expensive

#2 Overdrafts Short term use

-should only be used short term basis to cover cash flow shortfall

#2 Overdrafts Long term use

-too expensive
-use loan instead

#3 Retained profits

Profits kept by the business to reinvest after some year some trading

#3 Retained profit
pros

-doesn't pay interest
-no loss of share control
-take advantage of opportunities

#3 Retained profit cons

-new business and start ups wont have any retained profits
-may not have enough
-opportunity cost

#3 Retained profits Short term use

ideal to cover cash flow shortfall no intertest paid

#3 Retained profits Long term use

idesal for long term products, should be used to make ROI

#4 Share capital

Share capital is finance raised from issuing shares in the business
Share capital = issue price per share x number of shares
Shares can be issued to friends and family in a private limited company

share capital formula

=issue price per share x number of shares

#4 Share capital pros

-investors prepared to provide extra fundng
-more cost effective

#4 Share capital cons

-need great deal of background info to buy share
-expensive and slow

#4 Share capital Short term use

capital raised by selling shares shouldn't be used as a source of finance on short term debts

#4 Share capital Long term use

-may be used to purchase other companies, to merge or expand

#5 Loans

-have to pay it back with intertest lump sum

#5 Loans pros

-fixed cost means that business can plan
-dont ask for % of business

#5 Loans cons

-charge interest
-not flexible
-collateral

#5 Loans Short term use

might be possible and would be lower than a interest rate for overdraft

#5 Loans Long term use

-quite common in business to buy fixed assets

#6 Venture capital

-money invested to a business that is seen having strong growth potential
-expect high return

#6 Venture capital pros

-gets all the benefit of skills of venture capital investors
-ideal for start up owners who cant get a bank

#6 Venture capital cons

-look for a strong business plan, difficult for start ups
-want a stake in the business
-high growth start ups

#7 Crowd funding

large number of people fund a project over the internet
-donate, no money back but rewards
-lend, get money back with interest
-invest, exchange for equity/shares

#7 Crowd funding pros

-good alternative for lean for smaller business
-obtained without paying upfront fees
-generate and promote at the same time

#7 Crowd funding cons

-need to show of idea well

#7 Crowd funding Short term use

-not suitable for things like cash flow shortfall

#7 Crowd funding long term use

might be used for start up or big projects