3.1. Sources of Finance
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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)
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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