Sources of Finance

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  • Sources of finance 2
    • External sources
      • Overdraft + flexible way to fund working capital, acts as a buffer for day to day expenses - Bank may ask for repayment at any time and interest rates are high
      • Trade credit + Suitable for buying raw materials from suppliers as it gives the business opportunity to generate revenue before having to pay - Delays in payment can damage relationships with suppliers
      • Grants + Government  schemes might be available for some small businesses - Generally given for social, environmental or economic benefits
      • Leasing + Assets can be acquired without large capital spending to acquire them - In the long term a leased asset is more expensive than purchasing it outright
      • Bank loans + Can be negotiated to meet business requirements - Business has to pay interest and may have to offer collateral to secure it
      • Venture capital + Can bring expertise into the business - Owner may not want input from elsewhere into the running of the business
      • Share capital + It can access very large amounts of capital and no interest - Only available to Ltd (people you know) Plc (public)
      • Crowd funding + Cheap and easy to set up - Not suitable for raising large amounts of money
    • Internal sources
      • Retained profit + A free source of finance that does not incur interest          - Shareholders may wish to receive it back in the form of a dividend
      • Sale of asset + Frees up value in unwanted assets to be invested in other areas of the business           - The business loses the benefit of the asset, e.g. no longer owning a delivery vehicle
      • Owner's capital (personal savings) + A free source of finance that does not incur interest             - Owners could lose their personal investment
    • Factors to consider
      • Legal structure - some sources, such as share capital, are only available to companies.
      • Cost - some sources have very high interest repayments
      • Risk - sources that require collateral can be high risk
      • Flexibility - some sources are highly adaptable to meet the business's precise needs

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