What Are The Sources Of Finance ? | Ammad Awan by Ammad Awan Glasgow

Ammad Awan Glasgow What Are The Sources Of Finance ?

SOURCES OF FINANCE Sources of nance can be classi ed into:

External (raised from an outside source)

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Internal sources (raised from within the organisation)

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INTERNAL SOURCES There are ve internal sources of nance:

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Debt collection

Sale of xed assets

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Sale of stock

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Retained pro ts

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Owner’s investment (start up or additional capital)

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INTERNAL SOURCES

OWNER’S INVESTMENT

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This is money which comes from the owner/s own savings

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It may be in the form of start up capital - used when the business is setting up

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It may be in the form of additional capital – perhaps used for expansion

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This is a long-term source of nance

Advantages • Doesn’t have to be repaid • No interest is payable

Disadvantages • There is a limit to the amount an owner can invest

INTERNAL SOURCES

RETAINED PROFITS

• Business may not make enough profit to plough back

This is a medium or longterm source of nance

Disadvantages

It is when the pro ts made are ploughed back into the business

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Advantages

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This source of nance is only available for a business which has been trading for more than one year

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• Doesn’t have to be repaid • No interest is payable

• Not available to a new business

SALE OF STOCK

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This money comes in from selling o unsold stock

Advantages

This is what happens in the January sales

• By selling off stock it reduces the costs associated with holding them

It is when the pro ts made are ploughed back into the business

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This is a short-term source of nance

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INTERNAL SOURCES

• Quick way of raising finance

Disadvantages • Business will have to take a reduced price for the stock

INTERNAL SOURCES

SALE OF FIXED ASSETS

This money comes in from selling o xed assets, such as: a piece of machinery that is no longer needed

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This is a medium-term source of nance

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There is also a limit to the number of xed assets a rm can sell o

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Businesses do not always have surplus xed assets which they can sell o

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Advantages • Good way to raise finance from an asset that is no longer needed Disadvantages • Some businesses are unlikely to have surplus assets to sell • Can be a slow method of raising finance

INTERNAL SOURCES

DEBT COLLECTION

Not all businesses have debtors ie those who deal only in cash

Disadvantages

This is a short-term source of nance

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A business can raise nance by collecting the money owed to them (debts) from their debtors

• No additional cost in getting this finance, it is part of the businesses’ normal operations

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Advantages

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A debtor is someone who owes a business money

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• There is a risk that debts owed can go bad and not be repaid

EXTERNAL SOURCES

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Hire Purchase

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Mortgage

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Trade Credit

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Government Grants fi

Leasing

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Share Issue

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Additional Partners

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Bank Loan or Overdraft

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There are ve internal sources of nance:

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BANK LOAN

This is a medium or long-term source of nance

Advantages • Set repayments are spread over a period of time which is good for budgeting Disadvantages • Can be expensive due to interest payments

• Bank may require security on the loan

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This is money borrowed at an agreed rate of interest over a set period of time

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EXTERNAL SOURCES

EXTERNAL SOURCES BANK OVERDRAFT Advantages

Disadvantages • Interest is repayable on the amount overdrawn • Can be expensive if used over a longer period of time

This is a short-term source of nance

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• If used in the short-term it is usually cheaper than a bank loan

This means they can still write cheques, even if they do not have enough money in the account

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This is where the business is allowed to be overdrawn on its account

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• This is a good way to cover the period between money going out of and coming into a business

EXTERNAL SOURCES

ADDITIONAL PARTNERS

Advantages • Doesn’t have to be repaid • No interest is payable Disadvantages • Diluting control of the partnership • Profits will be split more ways

The new partner/s can contribute extra capital

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This is sources of nance suitable for a partnership business

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SHARE ISSUE

This is a long-term source of nance

Advantages • Doesn’t have to be repaid • No interest is payable Disadvantages • Profits will be paid out as dividends to more shareholders

• Ownership of the company could change hands

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Involves issuing more shares

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This is sources of nance suitable for a limited company

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EXTERNAL SOURCES

LEASING

Disadvantages • Can be expensive

• The asset belongs to the finance company

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It is arranged through a nance company • Businesses can have the use of up to date equipment immediately Leasing is like renting an asset • Payments are spread over a It involves making set repayments period of time which is good for budgeting This is a medium-term source of nance

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This method allows a business to obtain assets without the need to pay a large lump sum up front Advantages

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EXTERNAL SOURCES

HIRE PURCHASE

This method allows a business to obtain assets without the need to pay a large lump sum up front

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• Payments are spread over a period of time which is good for budgeting

The main di erence between hire purchase and leasing is that with hire purchase after all repayments have been made the business owns the asset

• Once all repayments are made the business will own the asset

• Businesses can have the use of up to date equipment immediately

Involves paying an initial deposit and regular payments for a set period of time

This is a medium-term source of nance

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Advantages

Disadvantages • This is an expensive method compared to buying with cash

MORTGAGE

The business will own the property once the nal payment has been made

• Once all repayments are made the business will own the asset

This is a long-term source of nance

• This is an expensive method compared to buying with cash

• Business has the use of the property

Disadvantages

• If business does not keep up with repayments the property could be repossessed

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• Payments are spread over a period of time which is good for budgeting

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Repaid in instalments over a period of time typically 25 years

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This is a loan secured on property

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Advantages

EXTERNAL SOURCES

TRADE CREDIT

Advantages •

Trade credit is summed up by the phrase:

• Business can sell the goods first and pay for them later • Good for cash flow • No interest charged if money is paid within agreed time

buy now pay later

This is a short-term source of nance

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Typical trade credit period is 30 days

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Disadvantages • Discount given for cash payment would be lost • Businesses need to carefully manage their cash flow to ensure they will have money available when the debt is due to be paid

EXTERNAL SOURCES

GOVERNMENT GRANTS

Usually certain conditions apply, such as where the business has to locate

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Government organisations such as Invest NI o er grants to businesses, both established and new

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Advantages • Don’t have to be repaid Disadvantages • Certain conditions may apply eg location • Not all businesses may be eligible for a grant

FACTORS AFFECTING CHOICE OF SOURCE OF FINANCE The source of nance chosen will depend on a number of factors:

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Ownership and Size of the business

Amount – how much money the business needs

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Time Period – how long the nance will be needed for

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Purpose – what the nance is to be used for

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