Chapter Goals... Explain the role of finance for businesses in terms of capital expenditure and revenue expenditure Explore internal finance options – personal funds, retained profit, sale of assets Explore external finance options – share capital, loan capital, overdrafts, trade credit, grants, subsidies, debt factoring, leasing, venture capital & business angels Define short- medium- and long-term finance Discuss the appropriateness, advantages, and disadvantages of finance for a given situation

Finance All businesses need money to support operations Capital expenditure – finance spent on purchasing fixed assets Assets that have a long-term function – machinery, land, vehicles, buildings, equipment Most can be used as collateral (financial security) Revenue expenditure – payments for the daily running of the business Wages, raw materials, electricity & indirect costs

Types of Finance - Internal Money generated from within the business Personal Funds Key source, especially sole traders Preferred source – easily available; no interest Retained Profit Profit that remains after all expenses and taxes paid Aka ploughed-back profit Advantages and Disadvantages – page 163

Internal Finance – cont’d Sale of Assets Selling off unwanted or unused assets Can be a good way of generating cash No interest or borrowing costs involved Drawback – may be difficult to find a buyer; can be time consuming

External Sources of Finance Share Capital – Money raised from selling shares of stock – aka equity capital Stocks – next slide Loan Capital – $ from a commercial lender Banks, credit unions, etc. Interest - fixed or variable Changes based on market conditions Advantage – makes cash quickly accessible; payment spread out over a designated period of time

Stock Refresher Initial Public Offering – when a business “goes public”. Buyer of stock – shareholder Publicly traded companies – stock sold on an exchange Two types of stock: Preference (Preferred) Stock – can earn a dividend before other shareholders; usually non-voting shares Ordinary (Common) shares – receive dividends after the preferred shareholder Usually granted voting rights

Finance - continued Overdrafts – used as a short-term source of finance Allows a business to temporarily overdraw their account Interest usually charged on a daily basis Often used when businesses are awaiting payments on account Provides flexibility for the business Trade Credit – buy now and pay later Credit period usually lasts days Allows you to delay payments to suppliers Can be an interest free method of raising funds

External Finance – cont’d Grants - usually provided by gov’t, foundation or trust Subsidies – Financial assistance from a gov’t, non- governmental organization or an individual Debt Factoring a financial service that allows businesses to generate money from debt quickly. Disadvantage – fee charged by the financial service Used by a business that has to generate cash quickly.

External Finance – cont’d Leasing – Lessee (business) contracts with a Lessor (Leasing Company) Machinery, cars, etc. Advantage – no high initial capital outlay Lessor takes care of repair and maintenance Over the long-term is more expensive Venture Capital - $ provided by investors to start-ups Start-up may have difficulty raising $$ from banks Venture capitalists own a stake in the business Looking for a detailed business plan – think SharkTank!

External Finance – cont’d Business Angels Aka Angel investors – affluent individuals who provide financial capital to start-ups Angels receive equity in the business in return Advantage – give more favorable financial terms Focus on helping a business succeed Disadvantage – may assume a good degree of control in the business

Short-, medium-, & long-term finance Short-term – refers to the current tax year Medium-term More than 12 months, put less than five years Long-term – any time period beyond the next five years

Factors influencing finance choice Purpose or use of funds Cost Status and Size Amount Required Flexibility State of the external environment Gearing Relationship between share capital and loan capital If a large proportion of loan capital to share capital, said to be high geared; opposite – low geared