I.S. Formative 1: Sources of Finance Quiz

1. Capital Expenditure: The investment it takes to start a business, the money used to maintain the business

  • Money spent on the fixed assets that are long-term (Buildings, vehicles for transport, machinery…etc.)

    • You buy the factory and you keep using it, thus gaining profit

    • For instance, you run the business by running the busses, since you don’t buy them repeatedly

2. Revenue Expenditure: Money used for the day-to-day operations, indirect costs

  • Indirect costs such as insurance, wages, raw materials, rent, electricity bills…etc.

3. Internal Sources of Finance: Money generated internally by the business

Personal fund: The money that you initially have in your bank account (Whatever money that you currently have to fund your own start-up)

  • You use what you have in your pockets, or what you have in your bank account:

Retained profits: All the income - tax, interest rate, dividends = retained profits (whatever left in your bank account at the end)

  • Your earning after paying all the tax, interest rate, dividends

Sales of assets: Selling one of the fixed assets of a company to perhaps, keep up with the market

  • For instance, if you have old machinery, you would sell that asset and buy something new with them

4. External Sources of Finance: The money generated outside of your business

Share capital: Sharing your own company

  • Disadvantage: The company does have full power to run the company (possibility)

    • If the shareholders have a high percentage of the company, the authority of decision-making can go to them

Loan capital: Person has enough potential to repay the loan, but doesn’t have enough money. Thus the person asks the bank for help.

  • For example: A building is first owned by the bank, and the person slowly pays it back with interest, and when the person finishes paying, they gain back the authority of the building

    • Mortgage: Secured loan for purchase of property such as lands or buildings that the borrower tries to repay back (example above

    • Business development loans: Expand an existing business, you have enough money but you want to expand you business

Overdraft: A solution for a short term problem (Minor amount of money, but the person still needs to find some money to repay it)

  • If the retained profits not enough, then the person can borrow some money from the bank to pay that term, the borrower will have to pay the bank back

  • For example: A person does not have enough money to pay the wages of September, thus he asks for money from the bank to pay for that month of salary (Often with higher wages)

Trade Credit: Instalment payment

  • Example: When A sells old machinery (sale of asset), and the retained profit is not enough to buy the new machinery, B sells machinery to A, and A pays the supplier for its machinery at a later scheduled date

Grants: Non-refundable government funds, though they might be hard to obtain

  • Start-up companies persuades the government to give them money, and the companies do not repay them

  • Like during Covid-19, individuals received extra money from the government (but they might be hard to obtain)

Leasing: The leasing company lends you an item that you will never own

  • For example: They let horizon use their Macbooks, but the Macbook never belongs to Horizon but always the leasing company

  • Disadvantages: The amount of money you pay for the leasing is more than the prices of the actual product

    • Long term: leasing is more expensive than hire purchase/ outright purchase of the assets

Venture Capitalists (VC): They invest in small/ medium businesses that have potential to grow by loan/ shares, so when the company grows, in return, they gain profits (like sponsers)

  • Companies search through banks to find these businesses

Angel Investors (AI): You are a small business that VCs cannot detect you, but there’s a person of wealth that can invest in you within your network

  • In your network, connections, someone you know…etc.

  • Extremely wealthy individuals (Who doesn’t mind even if they have money ) -Whether you are required to pay back or not depends on the agreement

For both AI and VCs, they often consider…

  • Return on investment: Am I able to return the money I invested? + Checks your business plan to determine your growth

Short, medium and long term finance: The various repayment periods

  • Short: Repay within 12 months - Loan, overdraft, leasing (short-term)

  • Medium: Repayment between 1-5 years - Leasing, commercial loans, hire purchase

  • Long: More than 5 years (Longest are generally mortgage, max 35 years) - Long-term loans (Mortgage)