3.1 Sources Of Finance

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Mind Map by susanycb, updated more than 1 year ago
susanycb
Created by susanycb over 6 years ago
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a simple mind map for 3.1 Sources of Finance

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3.1 Sources Of Finance
  1. The Need for Business Finance
    1. CAPITAL EXPENDITURE: the finance spent on purchasing fixed assets (e.g. land, buildings, equipment, machinery, etc.).
      1. REVENUE EXPENDITURE: refers to the payments for the daily running of a business (e.g. wages, raw materials, electricity, etc.)
      2. Internal Finance
        1. PERSONAL FUNDS: the main source of finance for a sole trader and for partners going into business together (e.g. Jaime Oliver, p.337)
          1. FAMILY & FRIENDS Borrowing from family and friends
            1. Often reasonably straightforward and inexpensive compared to borrowing from banks (require collateral before authorizing a loan).
              1. Usually very limited and often provoke arguments and fallouts.
              2. WORKING CAPITAL: refers to the money that is available for the day to day running of a business.
                1. comes from sales of goods and services
                  1. vital source of finance
                  2. 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.
                    1. business does not have to rely as much on borrowing (which incurs interest charge)
                      1. 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
                      2. SALE OF ASSETS: selling machinery that has been replaced or off out-of-season stock at discount (dormant assets)
                        1. INVESTING EXTRA CASH
                        2. External Finance
                          1. SHARE CAPITAL: money that has been raised from selling shares in the company
                            1. Preference Shares: preference shareholders earn a fixed dividend from a company's profits and paid before other shareholders
                              1. safe income stream + low risk investment in comparison to ordinary shares
                                1. preference shareholders do not benefit to the same extent as ordinary shareholders during highly profitable periods
                                2. Ordinary Shares/Equity Capital: dividend is unknown beforehand, based on the level of profits made by the company
                                3. LOAN CAPITAL: loans that are obtained from commercial lenders such as banks
                                  1. Mortgage: secured loan for the purchase of property
                                    1. Business Development Loan: catered to meet the specific development needs of the borrower
                                    2. OVERDRAFTS: allows a business to temporarily overdraw on its account
                                      1. TRADE CREDIT: allows a business to "buy now and pay later"
                                        1. GOVERNMENT GRANTS: government offering financial aid to support business activities
                                          1. GOVERNMENT SUBSIDIES: to reduce the costs of production, focus is to provide benefits to society
                                            1. DONATIONS & SPONSORSHIPS
                                              1. DEBT FACTORING: financial service that allows business to raise funds based on the value owed by their debtors
                                                1. option of non-recourse factoring for the provision of bad debts.
                                                  1. high fees charged by the financial institutions that offer debt factoring services
                                                    1. option of non-recourse factoring
                                                      1. high fees charged by the financial institutions that offer debt factoring services
                                                      2. LEASING: form of hiring whereby a contract is drawn between a leasing company (lessor) and the customer (lessee).
                                                        1. lessee pays rental income to hire assets from the lessor
                                                        2. HIRE PURCHASE (HP): business can pay for items in instalments
                                                          1. DEBENTURES: debenture do not usually have ownership or voting rights in how the business should work (long-term loans)
                                                            1. VENTURE CAPITALS: loans or shares invested by venture capital firms or individuals (high risk capital)
                                                              1. Return on investment
                                                                1. The business plan
                                                                  1. People
                                                                    1. Track record
                                                                    2. BUSINESS ANGELS: wealthy investors that choose to invest in businesses that offer high growth potential (high risk + high return).
                                                                    3. Short-term, Medium-term and Long-term Finance
                                                                      1. SHORT-TERM: refers to the current tax year + anything that has to be repaid to creditors and lenders within 12 months
                                                                        1. MEDIUM-TERM: refers to time period of more than 12 months less than five years
                                                                          1. LONG-TERM: refers to any period after five years (the longer the harder it becomes to plan efficiently).
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