Source of finance

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  • Created by: sian
  • Created on: 29-03-14 10:16
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  • Sources of finance
    • Internal
      • Retained Profit
        • Money left over after all costs have been paid - not given to shareholders
        • long term source of finance - can be used for anything
        • Not given to the shareholders - only for the business
        • Helps with business growth
        • Boosts business value
        • If a loss is greater than the previous retained profit it becomes negative - can happen if they distribute it to the shareholders and it is more than the earnings
      • Working capital
        • The money used in day to day trading
        • Good for day to day needs
        • Means the business has enough money day to day
        • The business can't run if the capital runs out - costs can't be paid
      • Sale of assets
        • The selling of an item of value owned by the business
        • Good for when a cash boost is needed
        • The business doesn't have to wait for the money as they own the assets
        • The amount of cash yield could be less than the value of the assets over time
    • External
      • Share capital
        • The money shareholders invest into the business
        • Long term source of finance - can benefit shaareholders
        • The rate of return shareholders get back is guaranteed
        • For preference shares there is a fixed rate of dividend (bad for business)
      • Mortgage
        • Long term method of borrowing - you agree a deal to pay back the money or they take the business
        • Good for when a business needs to buy property
        • Doesn't have to be paid back immediately
        • Interest rates aren't too high
        • The money has to be paid back with interest
        • long repayment - business always owes money
      • Venture capital
        • Money invested into a high risk project (adventure = venture)
        • Good for a business wanting to grow but is still high risk
        • No repayments needed
        • Management can regain control of business
        • Long term finance
        • Takes a lot of time
        • Shares have to be given up
        • Costs a lot
        • Only good for larger businesses
      • Government Grant
        • A certain amount of money made available by the government for a specific purpose
        • Good for training employees or buying equipment
        • Don't have to pay it back
        • Medium term source of finance
        • Good for businesses starting up
        • The money has to be used for something specific
        • Have to apply for it
        • Government may refuse the application
      • Loan/overdraft
        • Have to pay back with interest
        • Won't be allowed if business has a bad credit rating
        • Good when a business has to overcome a shortage of funds (short term)
        • Money can be accessed quickly and easily if they have a good credit rating
        • A bank arrangement where you can withdraw more money than you have - A loan can be similar to a mortgage
      • Trade credit
        • When a business sells goods but doesn't make the buyer pay straight away
          • Good for buyers who don't have immediate access to money
          • Helps increase sales as it makes people want to buy more - A good deal
          • If money is not paid back straight away the business might not have enough money to buy other goods
      • Credit cards
        • Banks supply a card so assets/products can be bought on credit
        • Good for when a money shortage has to be overcome
        • The money can be accessed quickly and easily
        • Debt can occur if the business can't pay the money back

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