3.1 Sources Of Finance

3.1 Sources Of Finance

1. The Need for Business Finance

   • CAPITAL EXPENDITURE: the finance spent on purchasing fixed assets (e.g. land, buildings, equipment, machinery, etc.).
   • REVENUE EXPENDITURE: refers to the payments for the daily running of a business (e.g. wages, raw materials, electricity, etc.)

2. Internal Finance

   • PERSONAL FUNDS: the main source of finance for a sole trader and for partners going into business together (e.g. Jaime Oliver, p.337)
   • FAMILY & FRIENDS Borrowing from family and friends
     • Often reasonably straightforward and inexpensive compared to borrowing from banks (require collateral before authorizing a loan).
     • Usually very limited and often provoke arguments and fallouts.
   • WORKING CAPITAL: refers to the money that is available for the day to day running of a business.
     • comes from sales of goods and services
     • vital source of finance
   • RETAINED/INTERNAL/PLOUGHED-BACK PROFITS: value of profits that the business keeps hold of (after paying taxes to the government and dividends to its share holders) to use within the business.
     • business does not have to rely as much on borrowing (which incurs interest charge)
     • 1. may not be sufficient for a firm to conduct its business (other sources of finance are needed) 2. keeping more of the profit for business means less of it is available for distributing to shareholders
   • SALE OF ASSETS: selling machinery that has been replaced or off out-of-season stock at discount (dormant assets)
   • INVESTING EXTRA CASH

3. External Finance

   • SHARE CAPITAL: money that has been raised from selling shares in the company
     • Preference Shares: preference shareholders earn a fixed dividend from a company's profits and paid before other shareholders
       • safe income stream + low risk investment in comparison to ordinary shares
       • preference shareholders do not benefit to the same extent as ordinary shareholders during highly profitable periods
     • Ordinary Shares/Equity Capital: dividend is unknown beforehand, based on the level of profits made by the company
   • LOAN CAPITAL: loans that are obtained from commercial lenders such as banks
     • Mortgage: secured loan for the purchase of property
     • Business Development Loan: catered to meet the specific development needs of the borrower
   • OVERDRAFTS: allows a business to temporarily overdraw on its account
   • TRADE CREDIT: allows a business to "buy now and pay later"
   • GOVERNMENT GRANTS: government offering financial aid to support business activities
   • GOVERNMENT SUBSIDIES: to reduce the costs of production, focus is to provide benefits to society
   • DONATIONS & SPONSORSHIPS
   • DEBT FACTORING: financial service that allows business to raise funds based on the value owed by their debtors
     • option of non-recourse factoring for the provision of bad debts.
     • high fees charged by the financial institutions that offer debt factoring services
     • option of non-recourse factoring
     • high fees charged by the financial institutions that offer debt factoring services
   • LEASING: form of hiring whereby a contract is drawn between a leasing company (lessor) and the customer (lessee).
     • lessee pays rental income to hire assets from the lessor
   • HIRE PURCHASE (HP): business can pay for items in instalments
   • DEBENTURES: debenture do not usually have ownership or voting rights in how the business should work (long-term loans)
   • VENTURE CAPITALS: loans or shares invested by venture capital firms or individuals (high risk capital)
     • Return on investment
     • The business plan
     • People
     • Track record
   • BUSINESS ANGELS: wealthy investors that choose to invest in businesses that offer high growth potential (high risk + high return).

4. Short-term, Medium-term and Long-term Finance

   • SHORT-TERM: refers to the current tax year + anything that has to be repaid to creditors and lenders within 12 months
   • MEDIUM-TERM: refers to time period of more than 12 months less than five years
   • LONG-TERM: refers to any period after five years (the longer the harder it becomes to plan efficiently).

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