Source of finance
- 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
- Retained Profit
- 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
- When a business sells goods but doesn't make the buyer pay straight away
- 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
- Share capital
- Internal
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