3.1 Sources of finance - IB Business Management
Factors influencing choice of source of finance
- purpose or use of funds - cost - status and size of the company - amount required - flexibility in switching from one source of finance to another - state of external environment - gearing (relationship between share capital and loan capital)
Debt factoring
A financial arrangement where the debt factor takes on the responsibility for collecting the debt owed to the business and provides the business with a percentage of the debt owed in cash
Personal funds
A source of finance for sole traders that comes mostly from their own personal savings
Leasing
A source of finance that allows a firm to use an asset without having to purchase it by cash
Trade credit
An agreement between businesses that allows the buyer of goods or services to pay the seller at a later date
Subsidies
Financial assistance granted by a government, an NGO, or an individual to support business enterprises that are in public interest
Venture capital
Financial capital provided by investors to high-risk, high-potential start-up firms or small businesses
Grants
Funds usually provided by a government, foundation, trust or other agency to businesses that do not need to be repaid
Business angels
Highly affluent individuals who provide financial capital to small start-ups or entrepreneurs in return for ownership equity in their businesses
Share capital
Money raised from the sale of shares of a limited company
Loan capital
Money sourced from financial institutions such as banks, with interest charged on the loan to be repaid
Revenue expenditure
Money used in the day-to-day running of a business
Capital expenditure
Money used to acquire fixed assets in a business (assets that last for more than a year)
Short-term finance
Mostly needed for the day-to-day running of the business, and lasts one year or less
Medium-term finance
Mostly used to purchase assets such as equipment or vehicles, lasts between one and five years
Retained profit
Profit that remains after a business has paid corporation tax to the government and dividends to shareholders
Long-term finance
Used to purchase long-term fixed assets, lasts between five and thirty years
Sale of assets
When a business sells off its unwanted or unused assets to raise funds
Overdrafts
When a lending institution allows a firm to withdraw more money than it currently ha sin its account