Sources of finance

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What do new businesses need?
New businesses need money to invest in long term assets such as buildings and equipment, cash to purchase materials, pay wages and to pay the day-to-day bills such as water and electricity. Profit made should be kept to finance growth.
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Cash flow and new businesses
Businesses may need to finance cash flow problems. A major customer may refuse to pay for the goods, causing a huge gap in cash inflows or there may be a large order requiring the purchase of additional raw materials
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All the internal sources of finance
Owners funds
loans from family and friends
retained profit
debt factoring
working capital
debentures
Selling unwanted assets
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Working capital
cash squeezed out of the day-to-day finances.By cutting stocks, chasing up customers or delaying payments to supplier cash can be generated
-short term solution and if cash is taken from day-to-day capital for a purpose such as buying long term assets the
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Debt factoring
-Short term solution
-can sour relationships between suppliers and customers
-state of the economy impact the fee
-Bank/debt factoring company keeps 4% for itself
-Firm receives about 96% of the value of the sale
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Debenture
A form of bond or long term loan-10 to 20 years-which is issued by the company with a fixed rate of interest.Secured by collateral and prioritised over shareholders
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All external sources of finance
Bank loans
bank overdrafts
share capital
venture capitalist
crowdfunding
trade credit
government grants
hire purchase
leasing
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Bank loans
-short term,one to two years, long term, more than five years
-interest charge
-collateral demanded by the bank to provide security in case the loan cannot be repaid
-bank not obliged to loan
-helps cash flow
-can be paid back in instalments
-Wont dilut
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Bank overdraft-facility that allows the business to be overdrawn
-Interest charges only apply to the actual debts instead of the facility itself
-no charge for clearing balance early
-easy to arrange
-Retains owners control
-short term, should only be used to cope with the ups and downs in a cash flow
-Interest charges
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share capital
selling shares in the business to investors who become shareholders to finance the business.
-long term solution
-inexpensive
-can bring new knowledge and experience to the boardrooms
-dilution of control
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Venture capitalist
Venture capitalist invest in smaller, riskier businesses;to compensate for the risks venture capitalist providers require a substantial part of the ownership of the company.They are also likely to want to contribute to the running of the business
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Pros and cons of venture capitalist
-brings new experience and knowledge
-long term solution
-dilutes owners control
-reduced profits
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Crowdfunding
Via the internet is a way of getting small investors to put money into anew business-often with incentive such as to get a sample product or service in return for their investment.
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Pros and Cons of crowdfunding
-Retain owners control
-accessible and easy to set up
-long term
-contributions not guaranteed especially if business is new
-many investments can be an administrative nightmare
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Trade credit
Business obtains goods or services from another suppliers but does not pay for these immediately
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Pros and Cons of trade credit
-good way of boosting day-to-day finances
-stricter deadlines for smaller businesses
-failure to pay on time can result in a loss of goods
-other businesses may be reluctant to trade with the business if they do not get paid on time
-short term solution
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Government grants
-strict criteria
-economy may determine may determine the amount of money provided to the business
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Hire purchase/leasing
-both short term solutions
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How does the owners intention impact the source of finance that should be used ?
Short term finance should not be used to finance long-term projects.Using short term finance puts continual pressure on the company's cash position.Growth is a long-term activity so appropriate long-term finance should be sought to fund it
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The balance between equity and debt
Equity means share capital,which is safe and stable, as shareholders need not be paid a dividend if times are tough.Debt based finance such as loans and overdrafts is more risky. Even when a business has a poor performance the bank still expects to be pai
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Other cards in this set

Card 2

Front

Cash flow and new businesses

Back

Businesses may need to finance cash flow problems. A major customer may refuse to pay for the goods, causing a huge gap in cash inflows or there may be a large order requiring the purchase of additional raw materials

Card 3

Front

All the internal sources of finance

Back

Preview of the front of card 3

Card 4

Front

Working capital

Back

Preview of the front of card 4

Card 5

Front

Debt factoring

Back

Preview of the front of card 5
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Comments

friedmanadam

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