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Sources of Finance

Sources of Finance. Learning Objectives. To understand how to finance a business using external and internal methods To understand how to improve profit. Start off…. Recap of Year 10 Draw a diagram with everything you remember about business finance

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Sources of Finance

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  1. Sources of Finance

  2. Learning Objectives • To understand how to finance a business using external and internal methods • To understand how to improve profit

  3. Start off… • Recap of Year 10 • Draw a diagram with everything you remember about business finance • What are the methods that a business can use to get finance?

  4. You should have….. Leasing Sale of Assets Share Capital Venture Capitalist Hire Purchase Debt factoring Loans Friends and Family Sale & Leaseback Mortgage Overdraft Retained Profit Trade Credit Debentures/Bonds Government Grants

  5. Why do businesses need finance? • When setting up • Working capital – day to day running of the business • To finance growth • Unforeseen events – sudden decline in sales, large customer fails to pay for goods on time and finance is need to pay for expenses.

  6. Borrowing Money

  7. Internal & External Sources of Finance • Internal • Finance that is obtained within the business • External • Finance that is obtained from outside the business

  8. From your list…. • Group each method into • Short Term • Medium Term • Long Term • Is each method INTERNAL or EXTERNAL?

  9. External Sources of Finance • Equity • Share Capital • Debt • Borrowing money • Overdrafts, Loans, Trade Credit, Bonds

  10. External Sources of Finance • Short-term finance – • Debt factoring – a debt factoring company will pay to its client all or part of the value of an outstanding invoice and then organises the collection of debt. • Overdraft – The bank allows a firm to overdraw up to an agreed level • Trade credit – a firm obtains goods/services from another business but does not pay for it immediately. They may be given 30, 60 or 90 days to pay for them. • Friends and family loans

  11. External Sources of Finance • For growth and expansion • Bank loan – secured and unsecured • Leasing • Hire purchase • Sales and leaseback • Share issue • Debentures/Bonds • Long term loans • Grants from the government Medium term Long term

  12. Which source of finance to use depends on… • Cost • Trade Credit – interest free • Retained Profit – interest free, but still a cost as money cannot be invested elsewhere • Borrowing money, loans, overdraft – interest has to be paid for the lifetime of the loan • Share – dividends to pay for the lifetime of the company, more shares = further the profit has to go round

  13. Risk • Retained profit & shares – risk free – don’t have to pay them • Loans or overdrafts – have to pay interest – cannot choose

  14. Availability of Finance • Retained Profit – excludes start up and businesses that have made a loss • Assets – can only sell assets if they own them • Loans – more established businesses • Debentures – very large companies • Trade Credit – amount depends on how much they spend • Much harder for smaller businesses to get finance

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