IB Business Sources of Finance

business angels

- Business angels are successful, wealthy business people, who invest their money into exciting new businesses, with a high growth potential. - Ex. shark tank - a source of share capital and only available to companies that are not listed on the stock exchange. - experienced investors looking for fast-growing companies, which can potentially make them a profitable return. - In addition to their investment, they may offer non-financial support, which could take the form of business contacts, advice and mentoring. - long term - Companies

venture capital

- The fundamental difference between venture capitalists and business angels is whose money is invested. - Business angels are private individuals who risk their money. Venture capitalists are companies that use the money from their clients to fund investments. - The long-term aim for a venture capitalist is to help the company grow so they can later sell their stake for an increased price. - a source of share capital and only available to companies that are not listed on the stock exchange. - experienced investors looking for fast-growing companies, which can potentially make them a profitable return. - In addition to their investment, they may offer non-financial support, which could take the form of business contacts, advice and mentoring. - long term - Companies

Other external sources of finances

- trade credit - debt factoring - leasing

grants

A grant is like a loan, but with no interest, that does not need to be paid back. - Governments may offer grants to businesses that are in a position to help the wider community. - For example, if a company relocates to an area of high unemployment, then the government may offer it a grant if it employs a certain number of new staff. The grants make investments more attractive for companies. They help to pay for fixed assets such as new buildings or equipment. - Grants have to be applied for, and as is true for many public institutions, it can take some time to be accepted. In addition, there may be conditions that must be met for how the money is spent. - long term - Sole traders Partnerships Companies Corporations Cooperatives Micro-finance providers P.P.P. N.G.O. Charities

loan capital

A loan is a medium or long-term (depending on the nature of the loan and the business) source of finance, typically used to buy fixed assets. - Mortgages are a special type of long-term loan, lasting 20 or 30 years, used to purchase land or buildings. - Traditional bank loans are usually considered medium-term loans, and are used to purchase capital equipment. - For any loans, collateral must be offered in case of default on the loan, and for mortgages this will always be the property being purchased. - The key advantage of a loan is that money is available immediately for investments, but is only repaid in small chunks, over a period of years. - This allows firms to use loans to buy profit-generating assets, such as trucks or machines, now and pay for them with the revenue they generate. - medium/long term - Sole traders Partnerships Companies Corporations Cooperatives Micro-finance providers P.P.P. N.G.O. Charities

Sale of assets

An asset is something a company owns. Fixed assets are items a company keeps for a period greater than one year, and can be used over and over again. - These usually generate income for a company. - They can be tangible, such as land, building or machinery or intangible, like patents or brand names. - When a corporation is in need of some cash, it may choose to sell one of its fixed assets. This raises massive amounts of money which can be reinvested into new projects. Like selling old machinery to upgrade to new ones. - medium, long-term - Sole traders Partnerships Companies Corporations Cooperatives Micro-finance providers P.P.P. N.G.O. Charities

overdrafts

An overdraft can be thought of as a high-cost, short-term loan. An overdraft is attached to a bank account. - charge very high rates of interest on the amount borrowed. - Overdrafts are one of the most expensive forms of borrowing. - If they are not paid off, interest can accumulate rapidly. - Overdrafts are useful for businesses as they allow them to meet day-to-day expenses while they are waiting for income from selling goods and services. - short term - Sole traders Partnerships Companies Corporations Cooperatives Micro-finance providers P.P.P. N.G.O. Charities

capital expenditures

Capital expenditure is spending on a firm's fixed assets. A fixed asset is something a firm plans to keep for longer than one year. Examples of fixed assets include purchases of land, buildings and machines. Capital expenditure is the long-term investment in these assets. Capital expenditure is normally funded using long-term sources of finance. Investment in capital expenditure allows a firm to grow in the future.

debt factoring

Debt factoring companies specialise in the collection of debts, commonly bad debts. - A debtor is someone who owes you money. Most companies have debtors; these are normally customers who have been offered trade credit but have not yet settled their accounts. - Unfortunately, sometimes these customers are unwilling or unable to pay their bills at the agreed time or even at all! The amount owed is referred to as a 'bad debt'. - Bad debt can cause enormous problems for small firms, who rely on the cash to pay their own suppliers. - the company owed money has to make a choice: less money now and allow the debt factoring company to chase the full amount, or wait and collect the full amount later. It will depend on how urgent any cash flow problems are. - Debt factoring should be seen as a last resort, as it ruins any relationship with customers, meaning that they will be highly unlikely to place future orders. - short term - Sole traders Partnerships Companies Corporations Cooperatives

Debt finance

Debt finance is money that is borrowed from a bank or other financial institution. - The borrowed money is available quickly so can fund investments. - However, when money is borrowed, interest must be paid to the lender, and can be defined as the cost of borrowing or the reward for saving. - Ex. loan capital, overdrafts.

External sources of finance

Equity finance Debt finance Financial aid Other sources of finance

Financial Aid

Financial aid is money that is invested in a business with almost no opportunity cost. It does not need to be repaid and there is no loss of ownership. - Financial aid generally comes from governments or NGOs who want to support local businesses. - There are two types of financial aid: subsidies and grants. - The difference between the two is that a grant will generally be paid only once, while a subsidy may be paid for each unit of good that is produced.

Equity finance

In return for offering equity finance, the provider will demand ownership of part of the company. Equity finance does not have to be repaid, and no interest is charged. However, the opportunity cost to the business of accepting equity finance is a loss of control and a loss of future dividends. - examples are share capital, venture capital, and business angels

internal Sources of finance

Personal funds Retained profits The sale of assets

leasing

Rather than buying a fixed asset (such as equipment, machinery, vehicles or premises), a business could choose to lease (hire) the asset over an agreed period of time. - The key advantage of leasing is that a company can have the benefit of using an asset without having to raise the finance to pay for it up front. - However, it does not own the asset. Therefore, if it wishes to carry on using the asset, it must continue to pay the leasing fee. - An additional benefit of leasing equipment and not owning it is that the company can always lease and then return the latest model. - It will subsequently not need to pay for maintenance or storage of the equipment. - short/ medium term - Sole traders Partnerships Companies Corporations Cooperatives Micro-finance providers P.P.P. N.G.O. Charities

Retained profits

Retained profit is money a firm has left at the end of the trading year after paying all costs, expenses, dividends and taxes. - It is the primary source of investment income for all businesses. - Retained profits are effectively a company's savings. They are built up over time. - If a business wants to invest in a new capital project, such as a new building, it may choose to save its retained profits each year until there is enough to pay for its construction. - used for contingency fund (reserved amount of money set aside for unforeseen needs in future) - there are no interest changes - The disadvantage of this is that it may take many years before the funds are in place, meaning potential lost sales while waiting for retained profits to be of sufficient size. - However, the advantage of using retained profits is that they do not have to be repaid. - can be long, medium, or short term - Sole traders Partnerships Companies Corporations Cooperatives Micro-finance providers P.P.P. N.G.O. Charities

revenue expenditure

Revenue expenditure is spending on a firm's general operational costs. It is best thought of as the day-to-day running costs of a firm; in other words, the cost a firm has to pay on a daily, weekly or monthly basis in order to keep trading. Examples of revenue expenditure include: Paying wages and salaries to workers. Paying suppliers. Utility bills such as gas, electricity and water. The repayments of debts, such as mortgages and loans. Settling tax bills with the government. If a firm cannot pay its revenue expenditure it will go out of business rapidly. This is referred to as insolvency. Employees will refuse to work, suppliers will cease sending materials and utility companies may shut off supplies. Revenue expenditure is funded using short- or medium-term sources of finance.

Subsidies

Subsidies are designed to increase production of goods that are deemed beneficial to society. - Subsidies are usually provided by governments. For example, a government may wish to increase food production while reducing the price consumers pay for their meals. This can be achieved by use of a subsidy. The government can pay farmers for each kilogram of food they produce. This will act as an incentive for farmers to maximise their output while helping them to keep their costs low. These savings are then passed on to consumers in the form of lower prices. - short/ medium term - Sole traders Partnerships Companies Corporations Cooperatives Micro-finance providers P.P.P. N.G.O. Charities

personal funds

This is money invested by the owner(s) of a company. Used by sole traders and partnerships. - can be long, medium, or short term - available to sole traders, partnerships, and cooperatives

share capital

This is money that is raised through the issue of shares. - This option is only available to companies and corporations. - To raise capital, a business will sell shares to new investors. Corporations will do this by issuing shares on the stock market. Anyone, if they want to, can purchase a firm's shares via the stock exchange. - Companies, however, usually those that are new or not particularly well-known, have to invite people to invest in the enterprise. - long term - Companies Corporations Micro-finance providers P.P.P.

Trade credit

When using trade credit, a company will obtain goods and services from a supplier immediately, but pay for them at a later date. - This is usually for a term of 30, 60 or 90 days. - No interest is charged during this credit period; it is just normal business practice for suppliers to offer trade credit to their regular customers. - Using trade credit allows a business time to sell the goods and services they produce, and then use that revenue to pay their suppliers. - If a supplier does not offer this service, then many of its customers may simply find another supplier. - short term - Sole traders Partnerships Companies Corporations Cooperatives Micro-finance providers P.P.P. N.G.O. Charities