- Purpose of business finance
- Capital expenditure
- To purchase fixed assets: properties and equipment; intended for business operations
- Revenue expenditures
- Payments for daily operations (direct and indirect costs)
- Internal sources
- Personal funds – savings, family, friends
- Retained earnings – income after taxation and dividends
- Sale of assets – selling of dormant or non-performing assets (liquidation)
- External sources
- Short term (0-12 months)
- Business angels
- Debt factoring
- Donations
- Government grants and subsidies
- Hire purchases
- Leasing
- Overdrafts
- Sponsorships
- Trade credit
- Venture capitalists
- Medium term (1-5 years)
- Business angels
- Government grants and subsidies
- Hire purchases
- Leasing
- Loan capital
- Sponsorship
- Venture capitalists
- Long term (>5 years)
- Business angel
- Debentures
- Government grants and subsidies
- Hire purchase
- Leasing
- Loan capital
- Share capital (preferred stock vs. commons stock)
- Types of sources
- Government grants
- Difficult to apply for grants, as governments seek benefits from their spent cash (since this is not repaid)
- Businesses can gain capital easily
- Governments can benefit from the boosted economy
- Venture Capitalists
- Individuals who invest large amounts of money in startups for shares
- Has some control over the business to guarantee return of investment
- Venture capitalists guide the businesses, in it for the money (for profit)
- Business angels
- Individuals who invest large amounts of money in startups for shares
- Not as involved in the decision making processes of the business
- Can be risky as business may fail or their equity might be bought out
- Businesses can raise capital easily while retaining control
- For altruism
- Crowdfunding
- Soliciting funds from the general public
- Businesses have to find ways to attract funding (e.g. incentives)
- Businesses may not receive anything
- Businesses can raise capital at little cost and can raise more than needed
- Funders can receive incentives or opt to give only a little money
- Sources of finance and business strategy
- Purpose of finance (why is the money needed?) – will determine how long the financing should be
- Cost (how much will it cost?) – cost of investment and cost to finance, including opportunity cost
- Amount required (how much should be bought/spent?) – large volumes require cheaper financing
- Time (how long before we pay?) – period needed to earn enough to pay back loan
- Status/size of firm (are we big enough for the loan?) – large companies can get better deals and easier processing/approval
- Financial strength (are we credible?) – credit record and gearing level are strong indicators of financial health
- External factors – state of economy, interest rates, etc. have an impact of loan availability