3.1 [ finance & accounts ]

state three sources ofinternal finance and five sources of external finance

INTERNAL SOURCES : 1. personal funds 2. retained profit 3. sale of assets EXTERNAL SOURCES : 1. overdraft 2. trade credit 3. subsidies 4. leasing 5. debt factoring

what is the difference between short-, medium- and long-term finance?

SHORT TERM - up to one year -> overdrafts -> trade credit -> debtors MEDIUM TERM - up to five years -> bank loans -> subsidies -> leasing LONG TERM - more than five years -> shareholders' funds -> mortgages -> debentures

distinguish between capital expenditure and revenue expenditure.

capital expenditure - spending on fixed assets and capital equipment of a business e.g. expenditure on buildings equipment, tools and vehicles ; aka investment expenditure revenue expenditure - the need for business to finance their daily and routine operations e.g. paying utility bills, purchase of raw materials

distinguish between internal and external sources of finance.

internal sources - come from within the business using its own resources external sources - come from outside of the organization

explain the rest of external sources

● overdrafts -> financial service that enables a business to withdraw more money than exists in its bank account; short term loan -> the loan period is negotiable , but tends to be short-term because the interest charges on overdrafts are usually very high -> very common type of borrowing for small business ● trade credit -> very common source of external finance that enables a business to obtain goods or services from a supplier without having to pay for these immediately -> the usual trade credit period is between one and two months; some suppliers offer a price discount for customers who pay their invoices earlier ● grants -> financial assistance from the government, given to qualifying businesses to aid their operations -> are often provided to reduce production costs for business and/or to encourage employment opportunities in las economically prosperous regions -> grants are not widely available as a source of finance and are often only available to small businesses ● subsidies -> are provided in order to encourage output -> help to stimulate investment that would otherwise be too expensive for business to pursue ● debt factoring -> us a business, such as a bank, that takes over the debtors of a business -> the debt factoring service provider will usually change on the remaining amount to the business ; this gives the business most of the value of debtors to improve its cash flow position without having to personally chase the payment from its customers ● leasing -> a common way for business to finance fixed assets without the necessary capital expenditure -> leasing contract commits the business to pay a monthly fee for a fixed period of time -> the fixed asset is not the property of the business, it is the leasing company that takes responsibility to maintain it

explain each internal source

● personal funds (for sale traders) -> sole traders are more likely to have their own personal funds from their savings in order to fund the start-up of their business ● retained profit -> refers to the surplus funds reinvested in the business rather than being distributes to shareholders in the for, of dividends -> it acts as an internal source of finance for the business as the fund being to the owners of the organization -> it is recorder on a firm's balance sheet as a part fi its equity ● sale of assets -> businesses can sell some of their fixed assets to raise finance -> it provides the business with an opportunity of dispose of fixed assets that are no longer needed

what are the differences between share capital and loan capital?

● share capital -> a long-term, external source of finance for a limited liability company obtained by selling shares of the company to individual and institutional investors -> an initial public offer (IPO) occurs when shares in a limited liability company are sold for the first time -> the value of share capital is based on the value of the shares when they were first sold, not the current market price of the shares -> as an alternative to loan capital, limited liability company can raise finance by selling additional share capital (dilutes ownership and control for existing shareholders) -> only public limited companies are allowed to trade their shares on a stock exchange ● loan capital -> borrowing finds form a financier (lender) such as a commercial bank -> includes mortgages bank loans and overdrafts -> set for a period of time -> the lender changes interest on the loan amount ; the interest can be fixed or variable -> a mortgage us a long-term source of loan capital which involves the financier demanding the borrower has collateral -> a debenture is a source of long-term loan capital, secured against a specific asset

distinguish between venture capital and business angels

● venture capital -> comes from external firms that invest in business start-ups and/or expanding small business with significant growth potential -> represents a combination of loans and share capital -> can be useful for business that are unable to raise finance through the stock market or bank loans ● business angels -> wealthy individuals who invest in high-risk business projects with high profit potential