Sources of finance

  • Created by: lara__001
  • Created on: 04-02-19 11:43

Short term sources of finance:

  • Bank overdraft
  • Trade credit
  • Factoring
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Medium term sources of finance:

  • Bank loans
  • Leasing
  • Hire purchase
  • Grants
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Long term sources of finance:

  • Share capital
  • Retained profits
  • Venture capital
  • Mortgage
  • Long-term bank loans
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What are the types of internal sources of finance?

  • Retained profits
  • Sale of assets
  • Owner's capital
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What are the types of external sources of finance?

  • Bank overdraft
  • Trade credit
  • Factoring
  • Share capital
  • Loans
  • Debentures
  • Mortgage
  • Hire purchase/leasing
  • Grants
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Retained profit

the profit kept in the business rather than paid out to shareholders as a dividend.


  • They are flexible - management have complete control over how they are reinvested
  • Do not dilute the ownership of the company


  • Danger of hoarding cash
  • Shareholders may prefer dividends
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Share capital

money invested into the business by the shareholders.


  • Only need to pay dividends if a profit is being made
  • Possible to raise large amounts of finance
  • No interest repayments


  • Loss of ownership as shareholders are part owners
  • Potential risk of loss of control
  • Complex and costly process of issuing shares
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Venture capital

capital invested in a project in which there is substantial element of risk, typically in a new/expanding business.


  • Can raise substantial amounts
  • Business benefits from specialist investor support
  • Brings better discipline to business management and strategy


  • Venture capitalist requires a high rate of return
  • Not long-term
  • Loss of control - venture capitalist may take a majority share in company
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Sale of assets

when a business sells its (idle) assets to raise capital.


  • Can raise a considerable sum of money
  • Improve profitability if no longer required


  • Possibility of receiving low value for the asset as they depreciate in value
  • There may not be a desired market for these assets
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the practise of funding a project or venture by raising money from a large number of people who each contribute a relatively small amount.


  • When sharing the idea, you often get feedback and expert guidance on how to improve it 
  • It is a good way to test the public's reaction to your product 
  • Your investors tend to be your most loyal customers


  • If you have a bad idea, then no one will fund it
  • High risks of fraud
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a legal agreement by which a bank lends money at interest in exchange for taking title of the debtor's property, with the condition that the conveyance of title becomes void upon the payment of the debt.


  • (fixed) you know exactly what your mortgage payment will exactly be for the whole of the residential loan
  • (adjustable) teaser rate - this is the starting interest rate of the adjustable mortgage. It is lower than the fully extended indexed rate
  • (adjustable) possibility of interest rates going down


  • If mortgage rates are high, you may not be able to pay it off
  • Risk losing property
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a form of debt that is paid offf over an extended time frame that exceeds one year in duration.


  • The business can purchase machinery now and use it in the business to start generating profit
  • Repayments are spread out over a long period of time, thus helping cash flow


  • Charged a large amount of interest
  • Can be difficult to have the loan paid back on time
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~ a contract by which one party conveys land, property etc to another for a specified time, usually in return for a periodic payment.


  • Less capital-intensive - less investment needed
  • The company grows more rapidly
  • May provide more flexibility to a business


  • If the business is successful, the lesser may demand higher rental payments when leases come up for renewal
  • Leasing can be expensive
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Hire purchase

~ a system by which one pays for a thing in regular instalments while having the use of it.


  • Enables businesses to buy assets when they have little cash available, or when they do not want to commit large amounts of cash to acquire assets
  • Useful for businesses that have little finance options
  • No collateral required - security pledged for payment of a loan


  • A large cash deposit may be required
  • Interest rates are generally higher than for bank loans
  • Failure to make payment in the asset being taken back
  • You don't fully own the asset until you've made your final payment
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Government grants

~ a public subsidy offered to a recipient for business.


  • Don't have to be repaid
  • Can be large amounts of money given


  • Application can be difficult
  • Not all businesses are eligible for one
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Bank overdraft

~ where a bank allows a firm to take out more money than is in its bank account.


  • Flexible way to fund working capital - acts as a buffer for day-to-day expenses
  • Less paperwork


  • Interest charge varies with changes in interest
  • Higher interest rate than a bank loan
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Trade credit

~ an arrangement in a business allows other companies to pay for goods or services several weeks/months after receiving them.


  • It is equivalent to a loan from the supplier and is interest free
  • It allows companies to use money for other purposes


  • There are usually discounts for prompt payments
  • Failure to pay on time can present problems on future orders
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Debt factoring

~ where a firm sells on its debt to a third party factor


  • Allows a business to recieve cash immediately
  • Reduces need for overdraft


  • The factor buys at a discount
  • Customers could be aware if debts are factored and lose faith in company
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Hey, are you doing Alevel business (AQA)? 

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