Sources of Finance

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  • Sources of Finance
    • EXTERNAL
      • BANKS
        • BANK OVERDRAFT - flexible short-term borrowing of a certain limit, interest, reviewed annually and security required.
          • FLEXIBLE - borrow and repay whenever
          • ECONOMICAL - interest only paid when overdrawn
          • INTEREST HIGHER THAN FOR BANK LOAN
          • IMMEDIATE REPAYMENT CAN BE ASKED FOR BY BANK
          • SECURITY - could include owner's house
        • BANK LOAN - for specific purpose, fixed or variable interest rates, set for a time period (medium/long term), repaid in regular installments, security required.
          • EASY TO BUDGET FOR - know timing and repayment amount
          • MAY BE FLEXIBILITY in repayment schedule
          • FAVORABLE INTEREST RATES can be negotiated
          • LONG TERM FINANCIAL COMMITMENT - can they keep up
          • SECURITY - possible owner's house
        • MORTGAGE - loan for purchasing property, the property is the security, can be finance for commercial property, interest (fixed or variable), fixed time period.
          • EASY TO BUDGET FOR - timing and amount known
          • IF FIXED RATE TAKEN WHEN IT IS LOW - cost of borrowing will be low
          • LONG TERM FINANCIAL COMMIMENT
          • SECURITY - property, possibly owners house
      • BUSINESS ANGELS - control but input + expertise
      • PRIVATE EQUITY CAPITAL - private financing for Ltd, shares have a percentage and input
        • LIMITED COMPANY - SHARES
          • ORDINARY SHARES - issued to shareholders in return for a fixed amount per share, can buy PLC shares on stockmarket.Dividend paid from profit.
            • RAISES MORE FINANCE - than sole or partnership
            • ATTRACTS NEW SKILLS AND EXPERTISE
            • DIVIDENDS VARY -according to profit. If low profit, no dividend paid.
            • PERMANENT CAPITAL - doesn't HAVE to be repaid
            • CONTROL - vote at AGM
            • CAN NEVER PAY IT OFF - will always pay dividends
            • IF THEY 'GO BUST', ORDINARY LAST TO BE REPAID (bad from shareholder's pov)
          • PREFERENCE SHARES - paid over ordinary shares. Fixed percentage dividend.
            • NO VOTING RIGHTS - no input into company
            • FIXED RATE - company can budget for this. They dont have to pay more than fixed rate if profits are high
            • ORDINARY SHAREHOLDERS MAY LOSE OUT - if profits are low the preference must be paid first
            • SOME CAN BE CARRIED FORWARD - still have to pay next year
        • DEBENTURE LOANS - fixed annual interest, fixed repayment date, no ownership rights given, company assets may be used as security
          • HOLDERS CANNOT VOTE - no control in company
          • FIXED INTEREST - can budget for
          • STILL HAVE TO PAY INTEREST - regardless of profit
          • REPAID BEFORE SHARES
    • INTERNAL
      • Funds from Owner
      • Funds from Profits
  • PARIS - purpose, amount, repayment, interest and security

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