Piotr (Peter) Burchardt
Tutor Name: Geoff Farr
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* Instruction Pack
* Source of finance
Source of Finance
Different ways businesses can obtain money.
Sources of finance can be classified into two different groups, which are internal and external sources of finance.
Internal –This is the type of finance which comes from the business, example of this could be assets sell.
When thinking about internal sources of finance, there are 5 main, which are most useful to business, and they are: Owner’s investments, Retained profits, Sale of stock, Sale of fixed assets, Debt collection
Owners investment – Those are the money which comes from the owner or owners of the business and its savings, it can be start-up capital (those are the money that are used when the business sis setting up). Also this could be in a form of additional capital, used for expansion (“The growth of a business' product and service offerings.”) Owner’s investment is a long-term source of finance. This could be a profitable way of getting finance for the business as it doesn’t have to be repaid. Also there is no interest payable. As well as good there are some bad things about it, there is a limit of money that owner can invest in the business.
Retained Profits – This source of finance is only available to businesses which has been out there (trading) for more than one year, those are the money that are made when the profit is coming back into the business and this could be a medium or long-term source of finance. Just like owner investment it doesn’t have to be repaid, and also there is not interest payable. Also there are bad things about it like, it’s not available to a business which is new in the market, also business may not make enough profit, in order to use it.
Sale of Stock – This is the money which comes from selling stock which left in the business. This is also called January sales, and it’s when the profit made are coming back into the business. This can be only used as a short-term source of finance. Good side of it is that it is a quick way of raising money to the business, also as stock is soled there business is free from paying for “holding them”. On the other hand it is not so good as business will have to take a reduced price for the stock. Sales of Fixed Assets – Those are the money that comes from selling of fixed assets which could be any machinery, equipment that is no longer needed, but business not always has fixed assets which can be sell off. Also there are limits to the number of assets that can be sold. This could be a medium term source of finance. This is a good way of obtaining money as business will raise money from assets that are no longer needed. However businesses not always have assets to sell. Also this could be a slow method of raising money.
Debt Collection – It’s an easy way of collecting money, as business raise the money by collecting money owed to them from their debtors, but not all businesses have debtors. Also this is only a short-term source of finance. This is good as there are no additional costs in getting this finance. On the second hand debtors may not be able to repaid the money.
External –This is the type of finance which comes from outside of the business, e.g. borrowing from a bank.
When thinking about external sources of finance, there are more than internal source of finance, and those are the main ones;
Bank Loan – This are the money borrowed from a bank at an agreed rate of interest over a set period of time. This could be a medium or long-term source of finance. It has a good and bad side. It can be good as repayments are spread over a period of time which is easy for business to operate with, however it can be expensive due to interest payments, also bank may require security on the loan (if u...