10.23.24-+3.1+&+3.2+Sources+of+Finance (3)

Introduction to Finance Unit 3.1

What is Finance?

• The study of business decisions concerning the generation and allocation of capital (money).

Purpose of Finance

• Capital Expenditure (CapEx): Finance spent on fixed assets (non-current assets).

  • Examples: Purchasing assets like equipment and properties.

• Revenue Expenditure (RevEx): Payments for the daily operations of a business.

  • Examples: Indirect costs like advertising, rent, and salaries.

Reasons for Capital Expenditure

• To add extra production capacity as a business grows.

• To improve efficiency by using the latest technologies.

• To replace worn-out, damaged, or obsolete equipment and machinery.

• To comply with changing legislation and regulations.

Examples of Capital Expenditures

• Capital equipment.

• Furniture, fixtures, and fittings.

• Computer and IT systems.

• Intellectual property.

• Machinery.

• Property and premises.

• Vehicles.

Revenue Expenditures

• Examples:

  • Advertising & promotion.

  • Energy costs.

  • Freight & delivery.

  • Insurance premiums.

  • Office supplies & administration.

  • Raw materials.

  • Rent.

  • Wages & salaries.

  • Monthly repayments to bank loans.

Sources of Finance Unit 3.2

Overview of Sources of Finance

• General term used to refer to where or how businesses obtain their funds.

Internal Sources of Finance

• Personal Funds: Main source for sole traders and partnerships, such as retained profits.

• Selling Assets: Includes dormant or fixed assets that are no longer in use.

• Working Capital: Day-to-day money generated from sales of goods/services.

External Sources of Finance

• Overdrafts: Allows businesses to temporarily overdraw on their bank account during cash flow problems.

• Loan Capital: Medium to long-term sources from commercial lenders (e.g., mortgages, business development loans).

• Trade Credit: Buy now and pay later, usually allowing 30-60 days for payment.

• Share Capital: Main source of income for most limited liability companies (LLCs).

Debentures

• Long-term loans issued by businesses where an investor provides a loan, returned with interest over time.

Business Development Loans

• Loans tailored for specific development needs, flexible for starting or expanding businesses.

Leasing and Hire Purchase

• Leasing: Hiring assets under agreed contracts.

• Sale-and-Leaseback: Transferring ownership while keeping the asset's use in the business.

Crowdfunding

• Raising small amounts of money from a large number of individuals using online platforms.

• Heavily regulated in many countries.

Business Angels and Microfinance Providers

• Business Angels: Wealthy individuals providing high-risk/high-return investments.

• Microfinance Providers: Focused on female entrepreneurs and disadvantaged members of society.

Advantages & Disadvantages of Microfinance Providers

• Advantages:

  • Accessibility to financial services.

  • Job creation.

  • Improvement in social wellbeing.

• Disadvantages:

  • Concerns on immorality.

  • Limited finance available.

  • Limited eligibility for applicants.

Business Ownership vs Sources of Finance

• Overview of various financing options available to different types of business structures such as sole traders, partnerships, and limited companies.

Terms of Finance

• Classification based on length:

  • Short-Term: Less than 12 months.

  • Medium-Term: 1-5 years.

  • Long-Term: More than 5 years (e.g., mortgages, debentures).

Questions and Examples of Financing Scenarios

1. Capital Expenditure vs Revenue Expenditure.

2. Internal vs External Sources of Finance.

3. Three sources of internal finance vs five sources of external finance.

4. Differences between share capital and loan capital.

5. Distinction between venture capital and business angels.

6. Differences in short, medium, and long-term finance.

7. Factors to consider when choosing sources of finance.