sources of finance

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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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