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Dependence on finance:an inherent industrialcharacteristic...

-Different ways a business can obtain money


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Venues for obtaining funds that come fromoutside an organization. External sources offinance might include taking on

new businesspartners or issuingequity or bonds to createlong termobligation, or commercial

paper to take on shorterterm debt.
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Factors Affecting Choice of

Source of Finance

The source of finance chosen will depend

on a number of factors:

Purpose what the finance is to be used for

Time Period how long the finance will be

needed for

Amount how much money the business

needs Ownership and Size of the business


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Sources of Finance

Sources of finance can be classified into:

Internal sources (raised from within theorganisation)

External (raised from an outside source)


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Internal Sources

There are five internal sources of finance:

Owners investment (start up or additional

capital)

Retained profits

Sale of stock

Sale of fixed assets

Debt collection


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Internal SourcesOwners investment

This is money whichcomes from the owner/sown savings

It may be in the form of

start up capital - usedwhen the business issetting up

It may be in the form ofadditional capital

perhaps used forexpansion

This is a long-term sourceof finance

Advantages

Doesnt have to be repaid

No interest is payable

Disadvantages

There is a limit to theamount an owner caninvest


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Internal SourcesRetained Profits

This source of finance is

only available for a

business which has been

trading for more than one

year

It is when the profits

made are ploughed back

into the business

This is a medium or long-term source of finance

Advantages

Doesnt have to be repaid


Disadvantages

Not available to a new

business

Business may not makeenough profit to plough

back


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Internal SourcesSale of Stock

This money comes infrom selling off unsoldstock

This is what happens in

the January sales It is when the profits

made are ploughed backinto the business

This is a short-termsource of finance

Advantages

Quick way of raisingfinance

By selling off stock it

reduces the costsassociated with holdingthem

Disadvantages Business will have to take

a reduced price for thestock


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Internal SourcesSale of Fixed Assets

This money comes infrom selling off fixedassets, such as: a piece of machinery that is

no longer needed

Businesses do not alwayshave surplus fixed assetswhich they can sell off

There is also a limit to thenumber of fixed assets a

firm can sell off This is a medium-term

source of finance

Advantages

Good way to raisefinance from an asset thatis no longer needed

Disadvantages

Some businesses areunlikely to have surplusassets to sell

Can be a slow method ofraising finance


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Internal SourcesDebt Collection

A debtor is someone who

owes a business money

A business can raise

finance by collecting the

money owed to them

(debts) from their debtors

Not all businesses have

debtors ie those who deal

only in cash

This is a short-term

source of finance

Advantages

No additional cost in

getting this finance, it is

part of the businesses

normal operations

Disadvantages

There is a risk that debtsowed can go bad and not

be repaid


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External Sources

There are 8 external sources of finance:

Bank Loan or Overdraft

Additional Partners

Share Issue Leasing

Hire Purchase

Mortgage Trade Credit

Government Grants


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External SourcesBank Loan

This is money borrowed

at an agreed rate of

interest over a set period

of time

This is a medium or long-

term source of finance

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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External Sources

Bank Overdraft This is where the business is

allowed to be overdrawn on itsaccount

This means they can still writecheques, even if they do not

have enough money in theaccount

This is a short-term source offinance

Advantages

This is a good way to cover theperiod between money goingout of and coming into abusiness

If used in the short-term it isusually cheaper than a bankloan

Disadvantages

Interest is repayable on the

amount overdrawn Can be expensive if used over

a longer period of time


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External SourcesAdditional Partners

This is sources of

finance suitable for a

partnership business

The new partner/s cancontribute extra capital

Advantages

Doesnt have to be

repaid

No interest is payableDisadvantages

Diluting control of the

partnership

Profits will be split more

ways


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External SourcesShare Issue

This is sources offinance suitable for alimited company

Involves issuing more

shares

This is a long-termsource of finance

Advantages

Doesnt have to berepaid


Disadvantages

Profits will be paid outas dividends to moreshareholders

Ownership of thecompany could changehands


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External SourcesLeasing

This method allows abusiness to obtain assetswithout the need to pay alarge lump sum up front

It is arranged through afinance company

Leasing is like renting anasset

It involves making set

repayments This is a medium-termsource of finance

Advantages

Businesses can have theuse of up to date equipmentimmediately

Payments are spread overa period of time which isgood for budgeting

Disadvantages

Can be expensive The asset belongs to the

finance company


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External SourcesHire Purchase

This method allows a businessto obtain assets without theneed to pay a large lump sumup front

Involves paying an initial

deposit and regular paymentsfor a set period of time

The main difference betweenhire purchase and leasing isthat with hire purchase after allrepayments have been made

the business owns the asset

This is a medium-term sourceof finance

Advantages

Businesses can have the useof up to date equipmentimmediately

Payments are spread over a

period of time which is good forbudgeting

Once all repayments are madethe business will own the asset

Disadvantages This is an expensive method

compared to buying with cash


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External SourcesMortgage

This is a loan secured onproperty

Repaid in instalments overa period of time typically 25years

The business will own theproperty once the finalpayment has been made

This is a long-term sourceof finance

Advantages Business has the use of the

property

Payments are spread over aperiod of time which is good for

budgeting Once all repayments are made

the business will own the asset

Disadvantages

This is an expensive methodcompared to buying with cash

If business does not keep up withrepayments the property could berepossessed


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External SourcesTrade Credit

Trade credit is summed up bythe phrase:

buy now pay later

Typical trade credit period is30 days

This is a short-term source offinance

Advantages

Business can sell the goodsfirst and pay for them later

Good for cash flow

No interest charged if money ispaid within agreed time

Disadvantages

Discount given for cashpayment would be lost

Businesses need to carefully

manage their cash flow toensure they will have moneyavailable when the debt is dueto be paid


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External SourcesGovernment Grants

Government

organisations such as

Invest NI offer grants

to businesses, bothestablished and new

Usually certain

conditions apply, such

as where thebusiness has to

locate

Advantages

Dont have to be

repaid

Disadvantages

Certain conditions

may apply eg location

Not all businessesmay be eligible for a

grant


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Reason for Opting

Sources of finance

when a debate starts for

Whats the inherent reason for inefficiency, under-

developed and Unorganised economy of our

manufacturing and services industries..?

All parties come to one conclusion that is

Becoz ofInsufficient Capital....


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Last Words...

By studying ways to acquire

finance from both internal and mainly

externally its helps to gain knowledge the

area from which cheap and most vitalFinance can be bought and put to its

potential and optimum use.

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