3.1 Sources of finance - IB Business Management

Capital expenditure

Money used to acquire fixed assets in a business (assets that last for more than a year)

Revenue expenditure

Money used in the day-to-day running of a business

Personal funds

A source of finance for sole traders that comes mostly from their own personal savings

Retained profit

Profit that remains after a business has paid corporation tax to the government and dividends to shareholders

Sale of assets

When a business sells off its unwanted or unused assets to raise funds

Share capital

Money raised from the sale of shares of a limited company

Loan capital

Money sourced from financial institutions such as banks, with interest charged on the loan to be repaid

Overdrafts

When a lending institution allows a firm to withdraw more money than it currently ha sin its account

Trade credit

An agreement between businesses that allows the buyer of goods or services to pay the seller at a later date

Grants

Funds usually provided by a government, foundation, trust or other agency to businesses that do not need to be repaid

Subsidies

Financial assistance granted by a government, an NGO, or an individual to support business enterprises that are in public interest

Debt factoring

A financial arrangement where the debt factor takes on the responsibility for collecting the debt owed to the business and provides the business with a percentage of the debt owed in cash

Leasing

A source of finance that allows a firm to use an asset without having to purchase it by cash

Venture capital

Financial capital provided by investors to high-risk, high-potential start-up firms or small businesses

Business angels

Highly affluent individuals who provide financial capital to small start-ups or entrepreneurs in return for ownership equity in their businesses

Short-term finance

Mostly needed for the day-to-day running of the business, and lasts one year or less

Medium-term finance

Mostly used to purchase assets such as equipment or vehicles, lasts between one and five years

Long-term finance

Used to purchase long-term fixed assets, lasts between five and thirty years

Factors influencing choice of source of finance

- purpose or use of funds

- cost

- status and size of the company

- amount required

- flexibility in switching from one source of finance to another

- state of external environment

- gearing (relationship between share capital and loan capital)