3.1 Sources of finance

Capital expenditure

Money used by the firm to purchase fixed assets

Revenue expenditure

Money used by the firm to run the day to day operations

Start up capital

What entrepreneurs use to pay for any or all of the required expenses involved in creating a new business

Working capital

Money used by the business for running its daily operations (used to purchase inventory, pay short-term debt

Internal finance

Money raised from the organization’s existing assets

External finance

Money that comes from outside the business

Retained profit

Money that a firm has left at the end of the trading year after paying all costs, expenses, dividends, and taxes

Interest

The cost of borrowing or the reward for saving money in the bank

Liquidity

A measure companies use to examine their ability to cover their short-term financial obligations

Overdraft

A short term loan with a high interest rate

Debt-factoring

Customers (debtors) who have not paid for the products that they purchased from the business - can sell this debt to a debt factoring company (they will give you the money at a discounted price)

Hire purchase

An arrangement for buying expensive consumer goods, where the buyer makes an initial down payment and pays the balance plus interest in installments

Leasing

An arrangement in which a business could choose to lease (hire) the asset over an agreed period of time rather than buying a fixed asset

Equity finance

In return for offering equity finance, the provider will demand ownership of part of the company

Long term loans

A loan that is paid off over an extended period of time greater than 3 years

Debentures or long term bonds

When a company loans to another company

Rights issue

When a company offers its existing shareholdes the chance to buy additional shares for a reduced price

Venture capital

Companies use money from their clients to fund investments

Business angels

Private (experienced) individuals who risk their money - invest their money into businesses with high growth potential

Subsidies

Designed to increase production of goods that are deemed beneficial to society

Microfinance

Financial services provided to low-income individual or groups who are typically excluded from traditional banking

Fixed asset

Items of value that are used for more than one year (machinery, land, building)