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Finance sources of Finance

cesleviciutek Business studies GCSE English 5.0Average rating 5.0 out of 5 (1 rating) 10 slides

Slides in this set (10)

  1. Finance Sources of Finance

    • Internal Sources
    • Retained profit/working capital
    • Family and friends
    • Cut down stock levels
    • Personal Capital/Owners funds
    • External Sources
    • Long term
    • Shares
    • Debentures
    • Long term bank loans
    • Grants
    • Mortgage
    • Government Grants
    • Medium term
    • Hiring and Leasing
    • Hire purchase
    • Short term
    • Bank Overdraft
    • Short Bank Loan
    • Creditors
    • Trade Credit
  2. Retained Profit

    • Advantages
    • They are cheap.
    • They are very flexible.
    • They do not dilute the ownership of the company.
    • Disadvantages
    • Danger of hoarding cash.
    • Shareholders may prefer dividends id the business is not earning a sufficient ROCE.
    • High profits and cash flow would suggest the business could afford debt (higher gearing).
  3. Owners funds

    • Advantages
    • Personal savings and other assets make a great source of capital.
    • You already have them.
    • Acquisition costs are minimal.
    • You won't be paying interest on a bank loan or sharing returns with investors.
    • Disadvantages
    • If you plough your personal savings into a business venture, you could lose it all.
    • Some assets, such as retirement accounts, are safe from creditors and bankruptcy courts; placing such assets at risk may not be good .
  4. Bank Loan

    • Advantages
    • A bank loans money to a business based on the value of the business and its perceived ability to service the loan by making payments on time and in full.
    • Banks do not take any ownership position in businesses.
    • Bank personnel also do not get involved in any aspect of running a business to which a bank grants a loan.
    • Once a business borrower has paid off a loan, there is no more obligation to or involvement with the bank lender unless the borrower wishes to take out a subsequent loan.
    • Disadvantage
    • Very difficult to obtain.
    • Banks are careful to lend only to businesses that can clearly
    • repay their loans, and they also make sure that they are able to cover losses in the event of default.
    • Personal assets can be seized in the event the business fails and is unable to repay all or part of a loan.
  5. Overdraft

    • Advantages
    • Timely Payments
    • Less Paperwork
    • Flexibility
    • Benefit in Interest Cost
    • Disadvantages
    • Higher Interest Rate
    • Risk of Reduction in Limit
    • Risk of Seizing
    • Debtors Collection becomes Lethargic
  6. Mortgage

    • Advantages
    • Likely to be similar to or less than a rental payment on the same property.
    • Monthly repayments will be predictable.
    • You aren't exposed to any sudden, large rent increases.
    • Interest payments on a commercial mortgage are tax-deductible
    • any gain in value of the property will increase your capital.
    • May be able to extend your existing premises, avoiding relocation costs.
    • You have control over what alterations you want to make to the premises.
    • Disadvantages
    • Unlike renting, you'll need to come up with a substantial deposit
    • If you own premises, you may find it harder to relocate
    • If you have a variable rate mortgage, you are exposed to increases in interest rates.
    • Owning a property means you'll be responsible for factors such as maintenance, fixtures and fittings, insurance, decoration and security.
    • Any fall in the value of the property will decrease your capital.
  7. Trade Credit

    • Advantages
    • It is easy and automatic source of short-term finance.
    • It reduces the capital requirement.
    • It helps the business focus on core activities.
    • It does not require any negotiation or formal agreement.
    • Disadvantages
    • Trade credit is available only to those companies that have a good track record of repayment in the past.
    • For a new business, it is very difficult to finance working capital through trade credit.
    • It is very expensive, if payment is not made on the due date.
  8. Government Grants

    • Advantages
    • They can provide huge monetary rewards with just one proposal.
    • Some government grants can total in the millions of dollars.
    • Those who receive government grants find it easier to raise money from other government and private sources.
    • These grants can be prestigious and give your organization instant credibility and public exposure.
    • Disadvantages
    • Preparing government grant proposals usually require hard work and tons of research and planning.
    • Government grants often come out with a set of rules for who are eligible to apply that can be so specific that it excludes many organizations.
    • Tend to demand certain activities must be included in any project to be funded.
    • Government grants are VERY competitive.
    • Government grants come with quite a bit of regulation and red tape.
  9. Hiring and Leasing

    • Advantages
    • Flexibility of repayment structuring is available.
    • Leasing prevents the risk of an asset’s value depreciating quickly.
    • Provides flexibility to enter into a new contract at the end of the original lease’s fixed term.
    • Financing asset purchases can be more tax efficient than standard-term loans.
    • High accessibility of financing for businesses due to the financing being secured with the leased asset and the asset being owned by the financing company.
    • In certain circumstances there is maintenance included within the terms of the agreement.
    • Disadvantages
    • Total sum of capital payments for HP or leasing will be higher than the full payment on the asset purchase.
    • Administrative complexity and costs will be greater if any covenants are applied to the arrangement.
    • Early termination charges or restrictions on subleasing.
  10. Hire purchase

    • Advantages
    • Often you can choose a fixed term and a deposit that fit your budget
    • Often you can choose a fixed term and a deposit that fit your budget
    • Seasonal repayments are also often available which means that you can tailor repayments based on your income if it varies at certain times of year.
    • The rate of interest and monthly payments are fixed throughout the duration of the agreement
    • A large payment at the end of the contract, known as a 'balloon payment' can also be used to reduce the monthly instalments
    • Disadvantages
    • You are in a fixed contract, and therefore if your financial situation changes during that period and you can’t afford the agreed monthly repayments, you may lose the asset.
    • Overall, you will pay more for the asset, if compared to buying for “cash”, as you’re paying interest in addition to the cost of the product.

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GCSE Business studies Slide Set on Finance sources of Finance, created by cesleviciutek on 23/03/2016.
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cesleviciutek
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