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3.1 Sources of finance
Terms in this set (26)
capital needed by an entrepreneur to set up a business
the capital needed to pay for raw materials, day-to-day running costs and credit offered to customers. In accounting terms: working capital=current assets-current liabilities
the finance spent on purchasing fixed assets
payments for the daily running of a business
internal sources of fnance
sale of assets
managing working capital more effectively
friends and family
investing extra cash
evaluation of internal sources of finance
This type of capital has no direct cost to the business, although there may be an opportunity cost and if assets are leased back after being sold, there will be leasing charges.
It doesn't increase the liabilities or debts.
There is no risk of loss of control by the original owners
Not available to all companies (newly formed companies)
Depending on IS of finance for expansion can slow down growth.
external finance division
external finance - short term
external finance - medium term
hire purchase and leasing
medium-term bank loan
external finance - long term
long-term bank loans
external finance - some other
Profit that remains after all the costs, dividends and taxes are paid and is kept within a business.
sale of assets
Money can be raised selling some dormant asset or selling stocks on a discount.
Some fixed assets can be sold and leased back if needed if there is a liquidity problem.
When companies reduce the assets - by reducing their working capital - capital is released, which acts as a source of finance or other uses.
A risk in cutting down working capital: managing working capital by cutting back on current assets by selling stocks or reducing debts owed to the business may reduce the firm's liquidity - its ability to pay short-term debts - to risky levels.
The most flexible
The bank allows the business to overdraw on its account a greater value than the balance in the account.
Often has high interest charges.
Bank can "call in" the overdraft and force the business to pay it back. This could lead to business failure.
Delaying the payment of bills for goods or services received.
Suppliers, or creditors, are providing goods and services without receiving immediate payment.
They are not free - discounts for quick payment and supplier confidence are often lost if the business takes too long to pay its suppliers.
Selling claims on debtors to a debt factor. Business obtains money from the debt factor in the value of one part of the debt. One part stays to the debt factor.
disadvantages of debt factoring
-additional charges for management, administration and maintenance of the accounts
-the larger the value of debtors and the riskier the business seems to be, the higher the charges tend to be
-not all businesses are eligible to use the service
-a form of hiring whereby a contract is drawn between a leasing company and the customer
-the rental income is source of finance for lessor
-constant release of cash
-the tax bill of the lessee is reduced
-a business can pay for items in installments
-once all payments have been made, the item belongs to the business
-a deposit is often needed
-if the buyer defaults on the agreement, the lender can repossess the asset
HP is form of buying on credit, interest charged
permanent finance raised by companies through the sale of shares
Loans that do not have to be repaid for at least one year.
May be offered at either a variable or fixed interest rate
Companies borrowing from banks will often have to provide security or collateral for the loan
Bonds issued by companies to raise debt finance, often with a fixed rate of interest.
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