sources of finance
- Created by: lydia hayman123
- Created on: 10-05-16 10:51
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- debt factoring
- internal source of short term finance
- a factoring company will buy the right to chase up the money owed to the business by creditors when offered sales credit.
- it improves cash flow in the short term as its an immediate receipt of cash
- chasing up debts for the business itself can raise admin costs
- factoring can encourage a business to be more careful with their provision of credit
- 5-10% of its revenue is taken when debts are factored which reduces profits
- high cost that comes with a factoring company
- customers may prefer to directly deal with the business rather than some other random company phoning them up
- an aggressive factoring company may upset customers
- bank overdrafts
- a bank allows a business to take out more money than what they have in their current account for a limited period
- comes with interest
- external short term source
- can be used on short term basis if business if struggling with a temporary cash flow problem
- seasonal fluctuations can lead to low sales and cash flow probs an overdraft is ideal to help a business at times of the year
- higher interest than on a loan
- ineterst rates can change so businesses find it hard to budget with changing payments.
- in order to receive an overdraft paperwork needs to be presented
- retained profits
- profits that are reinvested into the business rather than given to shareholders
- internal long term source
- cheap source as no interest needs to be paid
- no security required as its its own funds
- does not need to display finiancal information for support like for a bank loan
- during profitable periods more profits can be retained for the future
- shareholders don't get as much dividend
- retained profits can be misused by a company in the wrong way
- overcapitalization of retained profits
- share capital
- finances are raised by shareholders
- external long term source
- limited liability encourages shareholders to invest making it easier to raise finance
- the business doesn't have to pay dividends and instead can use the share capital for something else
- share cap can help to pay for assets which is collateral for a bank loan making it easier to get a loan
- high dividend payments to shareholders
- conflicting objectives between shareholders and original oweners
- loss of control of original owners
- loans
- money lent to a business from a bank
- comes with interest
- can be short term or long term and are external
- interest rates are fixed in advance so it makes budgeting nice and simple
- lower interest rate than on an overdraft
- designed to meet the needs of the c company in terms of the size of the loan
- size of the loan may be limited to the collateral that can be provided
- inflexibitly with the time period of interest to be paid can be paid no earlier or later
- more expensive than retained profits or share capital
- venture capital
- venture capitalists invest money in a business they think could be successful and offer the business advice
- external long term source
- suited to high risk companies that are struggling to get finance elsewhere
- allows interest to be delayed/dividends
- helpful advice can be offered and help to establish links
- it means giving up some ownership of the business as venture capitalist often demand a large share of the business
- high finance costs of interest
- excessive influence original owner could lose independance
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