Finance: The capital required by a business for various purposes.
Needed to set up and expand the business.
Involves funding for working capital, which covers day-to-day running expenses.
Definition: The money necessary for the day-to-day operations of a business.
Definition: Start-up capital spent on fixed assets that last over a year.
Examples: Vehicles, machinery, buildings.
Nature: Long-term capital needs.
Definition: Money spent on day-to-day expenses that do not involve purchasing long-term assets.
Examples: Wages, rent.
Nature: Short-term capital needs.
Obtained from within the business itself.
a. Retained Profit
Definition: Profit kept after the owners have received their share.
Advantages: No repayment or interest
Disadvantages: New businesses may lack retained profit; keeping profits reduces owner's share.
b. Sale of Existing Assets
Definition: Selling unneeded assets to raise finance.
Advantages: Utilizes capital better, no added debt.
Disadvantages: New businesses may not have surplus assets, and selling can take time.
c. Owner’s Savings
Definition: Personal finances invested by sole traders or partnerships.
Advantages: Quickly available, no interest.
Disadvantages: Increases risk for the owner.
Sourced from outside the business.
a. Issue of Shares
Definition: Limited companies can issue shares to raise capital.
Advantages: No need to repay capital or pay interest.
Disadvantages: Dividends must be paid; ownership may shift if many shares are issued.
b. Bank Loans
Definition: Money borrowed from banks.
Advantages: Quick to arrange, flexibility in duration, favorable rates for large companies.
Disadvantages: Interest must be paid, repayment required.
c. Debenture Issues
Definition: Long-term loan certificates issued by companies.
Advantages: Can raise long-term finance.
Disadvantages: Interest payments required, must be repaid after a period.
d. Grants and Subsidies
Definition: Financial aid from agencies that does not require repayment.
Advantages: Free money for businesses.
Disadvantages: Conditions must be fulfilled to receive grants.
e. Crowdfunding
Definition: Raising funds from a large group of people through platforms like Kickstarter.
Advantages: Donations do not require repayment or dividends.
For day-to-day operations.
I. Overdrafts
Definition: Allows businesses to spend more than their bank balance.
Advantages: Flexible borrowing amount; interest on overdrawn amounts only.
Disadvantages: Variable interest rates, potential for short-notice repayment.
II. Trade Credits
Definition: Delaying supplier payments improves cash flow.
Advantages: No interest or repayments.
Disadvantages: Late payments may affect future supplier relationships.
III. Debt Factoring
Definition: Third-party agents collect debts for businesses.
Advantages: Immediate cash availability; removes debt collection hassle.
Disadvantages: Debt collectors take a percentage of the collected debts.
Available for more than one year.
A. Loans
From banks or private lenders.
B. Debentures
C. Issue of Shares
D. Hire Purchase
Definition: Buy fixed assets and pay in installments.
Advantages: No need for large upfront payment.
Disadvantages: Initial cash deposit, potential for high interest.
E. Leasing
Definition: Use assets without purchasing them, with leasing payments made monthly.
Advantages: No large cash outlay, maintenance handled by leasing company.
Disadvantages: Overall leasing costs could exceed purchasing costs.
Purpose: Type of finance needed based on fixed or operational needs.
Time-period: Long-term for loans, short-term for overdrafts.
Amount Needed: Larger amounts suitable for loans, smaller amounts for overdrafts.
Legal Form and Size: Limited companies can issue shares; small firms have fewer options.
Control: Issuing too many shares can risk losing control over the business.
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