Sources of Finance

Question	Answer
capital needed by an entrepreneur to set up a business	start-up capital
the capital needed to pay for raw materials, day-to-day running costs and credit offered to customers. In accounting terms: working capital=current assets-current liabilities	working capital
the finance spent on purchasing fixed assets	capital expenditure
payments for the daily running of a business	revenue expenditure
retained profits sale of assets managing working capital more effectively personal funds friends and family investing extra cash	internal sources of finance
internal sources of finance This type of capital has no direct cost to the business, although there may be an opportunity cost and if assets are leased back after being sold, there will be leasing charges. It doesn't increase the liabilities or debts. There is no risk of loss of control by the original owners Not available to all companies (newly formed companies) Depending on Internal Source of finance for expansion can slow down growth.	evaluation of internal sources of finance
short medium long term	external finance division
overdrafts trade credit debt factoring	external finance - short term
hire purchase and leasing medium-term bank loan	external finance - medium term
long-term bank loans debentures	External finance - long term
share capital government grants government subsides donations sponsorship venture capital business angles	External finance - some others
Profit that remains after all the costs, dividends and taxes are paid and is kept within a business.	Retained profits
Money can be raised selling some dormant asset or selling stocks on a discount. Some fixed assets can be sold and leased back if needed if there is a liquidity problem.	sale of assets
When companies reduce the assets - by reducing their working capital - capital is released, which acts as a source of finance or other uses. A risk in cutting down working capital: managing working capital by cutting back on current assets by selling stocks or reducing debts owed to the business may reduce the firm's liquidity - its ability to pay short-term debts - to risky levels.	working capita
The most flexible The bank allows the business to overdraw on its account a greater value than the balance in the account. Often has high interest charges. Bank can "call in" the overdraft and force the business to pay it back. This could lead to business failure.	bank overdraft
Delaying the payment of bills for goods or services received. Suppliers, or creditors, are providing goods and services without receiving immediate payment. They are not free - discounts for quick payment and supplier confidence are often lost if the business takes too long to pay its suppliers.	trade credit
Selling claims on debtors to a debt factor. Business obtains money from the debt factor in the value of one part of the debt. One part stays to the debt factor.	dept factoring
-high fees -additional charges for management, administration and maintenance of the accounts -the larger the value of debtors and the riskier the business seems to be, the higher the charges tend to be -not all businesses are eligible to use the service	disadvantages of dept factoring
-a form of hiring whereby a contract is drawn between a leasing company and the customer -the rental income is source of finance for lessor -constant release of cash -the tax bill of the lessee is reduced	leasing
leasing company	lessor
customer	lessee
-a business can pay for items in installments -once all payments have been made, the item belongs to the business -a deposit is often needed -if the buyer defaults on the agreement, the lender can repossess the asset HP is form of buying on credit, interest charged	hire purchase
permanent finance raised by companies through the sale of shares	equity finance
Loans that do not have to be repaid for at least one year. May be offered at either a variable or fixed interest rate Companies borrowing from banks will often have to provide security or collateral for the loan	Long - term loans
Bonds issued by companies to raise debt finance, often with a fixed rate of interest.	debenture
mortgage debentures	secure debentures

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	Created by Narcisa Roncea about 5 years ago