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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.

    http://www.businessdictionary.com/definition/funds.htmlhttp://www.businessdictionary.com/definition/organization.htmlhttp://www.businessdictionary.com/definition/business-partner.htmlhttp://www.businessdictionary.com/definition/business-partner.htmlhttp://www.businessdictionary.com/definition/issuer.htmlhttp://www.businessdictionary.com/definition/equity.htmlhttp://www.businessdictionary.com/definition/bond.htmlhttp://www.businessdictionary.com/definition/create.htmlhttp://www.businessdictionary.com/definition/long-term.htmlhttp://www.businessdictionary.com/definition/obligation.htmlhttp://www.businessdictionary.com/definition/commercial-paper.htmlhttp://www.businessdictionary.com/definition/commercial-paper.htmlhttp://www.businessdictionary.com/definition/term-debt.htmlhttp://www.businessdictionary.com/definition/term-debt.htmlhttp://www.businessdictionary.com/definition/commercial-paper.htmlhttp://www.businessdictionary.com/definition/commercial-paper.htmlhttp://www.businessdictionary.com/definition/obligation.htmlhttp://www.businessdictionary.com/definition/long-term.htmlhttp://www.businessdictionary.com/definition/create.htmlhttp://www.businessdictionary.com/definition/bond.htmlhttp://www.businessdictionary.com/definition/equity.htmlhttp://www.businessdictionary.com/definition/issuer.htmlhttp://www.businessdictionary.com/definition/business-partner.htmlhttp://www.businessdictionary.com/definition/business-partner.htmlhttp://www.businessdictionary.com/definition/organization.htmlhttp://www.businessdictionary.com/definition/funds.html
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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

    No interest is payable

    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

    No interest is payable

    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.