1. Sources of Finance

2. Sources of Finance

4. Sources of Finance can be either:
Internal
External

5. Time Periods for Finance
Finance is generally considered to be either:
Short-term
Medium-term
Long-term
1 to 3 years
3 to 10 years
Over 10 years

6. Internal Sources of Finance
Retained profit
Sale of assets
Reduction in working capital

7. Internal Sources of Finance
Retained profits
Retained profits are profits that the organisation has made in
the past and has not given to owners in the form of profits or
dividends.
Personal savings
For a sole trader or for partners, personal savings may be an
important source of finance which can be brought into the
business as additional capital.

8. Continued… Sale of fixed assets
A business could sell off machinery, vehicles, land or buildings
that it no longer needs in order to raise finance.

9. Continued… Reduction in working capital
The business should try to reduce its stock so reducing working capital intake and the money it is owed by its debtors in order to raise more funds.
Risks involved as liquidity of business decreases.

10. Continued… Sale and lease back
A business sells of its assets to a finance company that then
leases the asset back to the business. This means that the
business can obtain cash when it needs it, but still have the use
of the asset.

11. Evaluation of internal sources of finance
This type of capital has no direct cost to the business.
Although, if the assets are leased back once sold, there will be leasing charges.

12. External Sources of Finance
Short-term
Trade Credit
Bank Overdraft
Debt factoring
Medium-term
Leasing and Hire purchase

13. Short term sources Bank overdraft Flexible of all sources
Amount can vary from day to day.
Bank allows to overdraw from account by cheques
Highest interest charges
Business stability question

14. Short term sources
Trade Credit: Usually in business dealing supplier give a grace period to their customers to pay for the purchases. This can range from 1 week to 90 days depending upon the type of business and industry. Advantage :No interest has to be paid. Dis advantage:The business may not get cash discounts By delaying the payment of bills for goods or services received, a business is, in effect, obtaining finance which can be used for more important expenditures.

15. Short term sources Debt Factoring
A factoring firm will buy a firms debts and assume the risk on
non-payment. The factor collects the debts directly from the
businesses customers.
It involves the business selling its bills receivable to a debt factoring company at a discounted price. In this way the business get access to instant cash.

16. Medium Term Finance
Hire purchase: It involves purchasing an asset paying for it over a period of time. Usually a percentage of the price is paid as down payment and the rest is paid in installments for the period of time agreed upon. The business has to pay an interest on these installments.
Leasing: Leasing involves using an asset, but the ownership does not pass to the user. Business can lease a building or machinery and a periodic payment is made as rent, till the time the business uses the assets.  The business does not need to purchase the asset.

17. Hire purchase and Leasing
Advantages
The business can benefit from the asset without purchasing it.
Usually the maintenance of the asset is done by the leasing firm.
Disadvantage
The total cost of leasing may end up higher than the purchasing of asset

18. Continued… Long-term Finance Long term Loan Debentures
Sale of Shares-equity finance

19. Long term Loan
Long term Bank loan: borrowing from bank for a limited period of time. The business has to pay an interest on the borrowing. This interest may be fixed or variable. Businesses taking loan will often have to provide security or collateral for the loan.

20. Debentures
A debenture is defined as a certificate of acceptance of loans which is given under the company's stamp and carries an undertaking that the debenture holder will get a fixed interest rates and the principal amount whenever the debenture matures.
It is issued for a long periods of time. Debentures are generally freely transferrable by the debenture holder. Debenture holders have no voting rights and the interest given to them is a charge against profit.

21. Sale of shares – Equity Finance
Issue of share: It is a permanent source of finance but only available to limited companies. Public limited companies can sell further shares up to the limit of their authorized share capital. Private limited companies can sell further shares to existing shareholders.

22. Sale of shares – Equity Finance
Advantages
Disadvantages
Permanent source of capital.
No interest rate
Dividends have to be paid to the shareholders

23. Venture capital
Risk capital invested in business start ups or expanding small businesses that have good profit potential but do not find it easy to gain finance from other sources.
For unlisted small risky companies
Specialist org or wealthy people give it
Capitalist expect part of profit as return

24. Video
sources of finance video

25. Finance for unincorporated businesses
What is un incorporated business??
Micro finance

26. Finance and stake holders
Table 26.1 pg 485
Activity 26.6 pg 486

27. Raising External Finance
The importance of business plan .
Table 26.2 pg 487