3.1 Source of Finance

Grants

-External, short term -Funds which are given mostly by the government organisation or foundation or a trust to the non-profit organisations for educational or institutional purposes. Pros: -Helps for growth of a specific project -Less compromises with the shareholders. -If you use the first one positively, you may easily get one more. Cons: -Money given for a specific task can't be used for elsewhere. -Once the trust with the investor is lost = No more grants

Overdraft

-An overdraft is an external temporary facility added to bank accounts where one is able to withdraw more money than what exists in the account. - Charged interest (based on the overdrawn amount and the length of time the account is overdrawn) Pros: -flexible: you borrow what you need at the time which can make it cheaper than a loan -It is arranged quickly -Bank's will not normally charge fees for paying off the overdraft early Cons: -if overdraft has to be extended, you can be charged extra -The bank may charge you if you exceed the overdraft limit without authorization. -The banks holds the right to ask for repayment of overdraft at anytime -Overdrafts can be secured against business assets -You can only get an overdraft from a bank you hold an account at, mostly because a transfer is required. -Interest rate applied is variable, making borrowing costs hard to calculate. -If you do not use the overdraft, the bank may reduce it on short notice.

Trade Credit

-External and Short Term -"Trade credit is the credit extended to you by suppliers who let you buy now and pay later. " Pros: -Trade credit insurance insures that receivables are freed up for working capital. -A risk mitigation tool for all company sizes -Ensures confident/comfortable trading. -Credit insurance: your partner in solving or eliminating non-payment of commercial debt, international trade safety net, covers political risk, will pay off debt. Cons: -high administration expenses -people can buy more than they can afford -more working capital needed

Debt Factoring

-External and medium term -Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. Pros: -this type of financing is very efficient for small and medium sized enterprises as they don't have to wait for bank loans. - it offers a fast process of financing. -With debt factoring, you get cost effective collections. When you sell accounts receivables, the company efficiently hands off the whole procedure of accounting receivable collections which benefits the business in so many ways. cons: -Depending on the discount amount, a factoring agreement may imply a very high cost of capital. This cost must be compared to the cost of other methods of financing available to the business. -the company in return has to invite a third party into their company. They may try to control sales methods.

Subsidies

-External, constant -The prices of products/ services reduced by the government for the consumers, who can or cannot afford the product. -ex. reduced rates for students or children Pros: -Reduces the cost of production -To improve economic distribution Cons: -There will be a shortage of product. Less price = more demand. Keeping up to the demand can be difficult. -To get this money back government has to do something, ex. increase in tax.

Loan Capital

-External, long term -The part of a company's capital employed that is (1) not equity capital, (2) earns a fixed rate of interest instead of dividends, and (3) must be repaid within a specified period, irrespective of the company's financial position. -Loan capital may be obtained from a bank or finance company as long-term loans, or from debt-equity investors in the form of debentures or preferred stock (preference shares) Pros: -Loan does not need to be repaid by the business owner if company fails -> business would be liquidated -Flexibility of payment deadlines -More money to operate for the company -Securing business start-up Cons: -Often late repayment penalty -interest

Venture Capital

-External, short term -Money provided by investors to startup firms and small businesses -This capital would not have otherwise been able to acquire capital from a bank as a loan -these businesses have perceived long-term growth potential. Pros: -potential for above-average returns -allows growth for new businesses that may not have otherwise been possible -attractive for new companies that are lacking history -Venture capitalists provide expertise and industry connections that can be extremely valuable. Cons: -high risk for the investor -difficult to acquire for the business (bureaucracy) -The business may have to compromise when making strategic decisions as the VC investor would have a lot of say -business under constant scrutiny

Business Angels

-External, short/medium term -A wealthy individual who provides start up capital in exchange for convertible debt: bonds converting value or redeeming cash or ownership equity Pros: -quick decisions -no collateral (pledged for loan repayment) -investor's knowledge and contacts -mentoring/management skill -no repayments or interests Cons: -Limit and minimal amount of investment -Suitable Investors -giving up share -less available structural support

Personal Funds

-Internal and Short Term -Main source of finance for the sole traders or a partnership. It is the use of the own money of the sole trader/partners that they invest to start up their business. -The advantages of using these types of funds is that you don't have debt service payments, you don't have operating restrictions placed on you. The investment is the sole traders own choice and he has the control over it. -Disadvantages : big risk and no leftover money

Leasing

-Internal, Short/medium term -Leasing is a legal document with which one party rents a certain property from another party. -Lessee = the person/group renting -Lessor = the person/group inheriting the property Pros: -spreading of cost - the cost of a rental is spread over a number of years and therefore helps to maintain cash flow -security - since this is a rental the lessor still inherits the product and therefore increases the security on the finance -tax advantages Cons: - no ownership - Long term expenses - Maintenance

Retained profit

-Internal, short term -Capital left after dividends and taxes have been paid. Pros: -More capital available for growth - used to reinvest into the company -They are flexible: management can decide over how they are reinvested Cons: - to increase retained profit companies could decrease dividends, which they need for economic crises

Selling Assets

-Internal, short term -Sales of machinery or other long term products to a third party where the third party gains full control of the product. If it doesn't gain full control its not considered selling Assets Pros: -Long term Investment -Increase cash flow -Control Cons: -Generally load of money required to buy Assets -Profit/ Loss is recorded

Share Capital

-Share capital is the money invested in a company by the shareholders. -Internal - Long Term -All of the issued share capital of a company, apart from capital carrying a right to a dividend at a fixed rate only. Pros: -Helpful in raising long term capital for a company -is surplus in the company Cons: -Permanent burden on the company to pay a fixed rate of dividend before paying anything on the other shares.