SOURCES OF FINANCE

Short Term Sources of Finance

• Overdraft:

one of the most common solutions to a business’ cashflow problem. The bank agrees to set a limit on the customers bank account which they must not go above – the overdraft facility. The amount the customer borrows is called an overdraft.

Short Term Sources of Finance

Sale of Assets:

business may decide to sell some of its assets to gain capital. This can have a negative effect on the company by weakening its operations.

Short Term Sources of Finance•Trade Credit:

•A useful source of finance provided by suppliers. •Suppliers allow the business to use goods or services before they pay for them – they agree on a credit period (usually 30 or 60 days).•It is important that payments are made on time or else the supplier may decide to stop offering trade credit.

Medium Term Sources of Finance

•Bank loan:

•bank will allow the business to borrow an agreed sum of money to assist them in their trading. The business must pay the bank a level of interest on their loan – this will be determined by how risky the loan is. Eg. A loan to a sole trader who has just started-up and has no previous records of success, would be viewed as high risk.

MediumTerm Sources of Finance

• Retained Profit:

• this is profit that is ploughed back from one year to the

next. Once shareholders have been satisfied and their

dividend paid, managers can use the profit leftover

(retained) within the business.

Medium Term Sources of Finance

•Leasing:

•the business “Leases” or “Rents” the asset from the company that owns it (Eg An office, factory or car). and makes regular payments to the owner.•This saves the company having to find a large amount of money to purchase the asset outright.•Some businesses raise finance by leasing factory or office space that is not being used.

Medium Term

Hire Purchase: • the business gets to use the asset and

pay for the asset in regular small amounts until it is completely paid for.

• Hire purchase agreements usually last for 6 months – 2 years

• The disadvantage of HP is that the payments incur high rates of interest;

• Eg car costs new = £10,000• Paid over 2 years at £600 per month• Total payment + £600 * 24 = £14,400

LongTerm Sources of Finance

• Owner’s own Capital:

Sole trader may use personal savings; borrow from family and friends.

Partnership may introduce another partner who will bring their own money;

Public Limited Company (plc) may issue more shares.

Long Term Sources of Finance

• Issue Share Capital:

• Public limited Companies (plc) can issue shares to shareholders – people who invest in a company and receive a return on their investment (dividend).

• Private limited companies (ltd) can invite a new shareholder to invest money

Long Term Sources of Finance

• Debentures:

• People can invest a sum of money in the company over a fixed period of time. At the end of this period the investors receive their initial payment plus interest. The rate of interest paid will reflect the level of the investment.

Long Term Sources of Finance

• Mortgage:

• a loan which is secured against a property. This is a less risky option for the bank as they are guaranteed their loan back.

• If the company went bankrupt the bank would simply takeover the premise.

Long Term Sources of Finance

• Venture Capital:

• People who are willing to take a risk! • Venture capitalists are common providers of

finance for small or start-up businesses. • They provide an amount of capital and gain a

shareholding of the business. This means that the venture capitalist could own as much as 49% of the business in return for his/her investment.

Long Term Sources of Finance

• Government Assistance:

• Grants can be paid to businesses who set up in areas of high unemployment.

• The government pays the grant to encourage the business to locate in areas of high unemployment because new business will bring new jobs to the area.