Sources of Finance

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Internal Sources of Finance
Funds provided by owners, funds from profit
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Internal Sources of Finance: Drawbacks
After the initial investment it cannot be relied upon to provide money when it is required e.g. the owner may not have any further cash or the business may be making a loss
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External Sources of Finance
Bank loans/mortages/overdrafts, private equity capital, business angels
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External Sources of Finance: Overdrafts/loans/mortgages
Overdrafts to finance day-to-day trading, loans and mortgages to purchase assets e.g. machinery, computers, property
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External Sources of Finance: Private equity capital
Private equity company provides finance and in return they receive a percentage of the shares of the business and an active role in running the business
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External Sources of Finance: Private equity capital Advantages/Disadvantages
Receive expertise and money from the investing capital/ long-term commitment
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External Sources of Finance: Business Angels
They are wealthy individuals (often entrepreneurs or retired executives) who invest their own money and take a percentage stake in the business and help to run it
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Forming a Limited Company to Gain Additional Finance
Private equity and venture capital companies only provide finance to limited companies so they may form a limited company to get additional finance
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Factors to Consider when Applying for Finance
Purpose, Amount, Repayment, Interest, Security
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Bank Overdraft
A flexible arrangement to borrow money up to a limit, interest, repayable on demand, security
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Bank Overdraft: Advantages/Disadvantages
flexible, interest only when they borrow/high interest, immediate repayment, security
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Bank Loan
Often to purchase an asset, interest, set time period, repaid in regular installments, security
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Bank Loan: Advantages/Disadvantages
easy to budget, flexible repayments, interest negotiable/long-term financial commitment, security
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Bank Commercial Mortgage
Property is used as security, provide finance for purchase of property, interest, set time period
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Bank Commercial Mortgage: Advantages/Disadvantages
easy to budget, fixed rate/long-term financial commitment
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Limited Company Ordinary Shares
Issue shares to gain finance, issued in return for fixed payment, shareholders receive dividend payments, buy shares on stock exchange, can issue more shares for additional finance
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Limited Company Ordinary Shares: Advantages/Disadvantages
raise a large amount of finance, attract new management, dividends vary dependent on profits/shareholders can have control, always the need to pay dividends, ordinary shareholders are the last to be paid if the company 'goes bust'
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Limited Company Preference Shares
Have preference over ordinary shares as they claim profit before ordinary shareholders, fixed percentage rate dividend
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Limited Company Preference Shares: Advantages/Disadvantages
unable to vote at shareholder meetings, dividends at fixed percentage rate/ordinary shareholders may lose out as preference shareholders are paid first
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Debenture Stock
Has a fixed interest, fixed repayment date, only relates to loans made to the company, can be traded on stock market, company assets may be security
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Debenture Stock: Advantages/Disadvantages
unable to vote at shareholder meetings, interest has a fixed percentage rate/if no profit is made then interest will be paid at the fixed rate on the due date, can give shareholders better rights than ordinary shares to retain repayment
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Other cards in this set

Card 2

Front

After the initial investment it cannot be relied upon to provide money when it is required e.g. the owner may not have any further cash or the business may be making a loss

Back

Internal Sources of Finance: Drawbacks

Card 3

Front

Bank loans/mortages/overdrafts, private equity capital, business angels

Back

Preview of the back of card 3

Card 4

Front

Overdrafts to finance day-to-day trading, loans and mortgages to purchase assets e.g. machinery, computers, property

Back

Preview of the back of card 4

Card 5

Front

Private equity company provides finance and in return they receive a percentage of the shares of the business and an active role in running the business

Back

Preview of the back of card 5
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