Source of Finance

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Introduction about
sources of finance
Financial Resources
 What the business have available it could be cash,
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securities, creditors , loan facilities and possessed.
There are number of ways in which a business can
raise the finance necessary to purchase assets and fund
working capital. The method chosen depends upon:
The amount of money required by the business
The risk that the business represents to potential
lenders
The time period over which the loan is required
Internal sources of finance
 Funds generated from an organisations own resources
e.g. retained profit, sales of perhaps 4%.
 Existing capital can be made to stretch further. The
business may be able to negotiate to pay its bills later
or work at getting cash in earlier from customers.
 Nothing soothes a difficult cash situation better than
profit. It is also the best and most common way to
finance investment into firm’s future. Research shows
that over 60% of business investment comes from
reinvested profit.
External sources of finance
 If the business is unable to generate sufficient funds
from internal sources then it may need to look to
external sources. There are two sources of external
capital: loan capital and share capital.
 Loan capital: the most usual way is through barrowing
from a bank this may be in the form of a bank loan or
an overdraft. A loan is usually a set of period of time. It
may be short term( one or two years), medium term
(three to five years)or long term( more then five years)
the loan could be paid back in instalments over time or
at the end of the load period.
 Leasing : is when the business can make use of the
resources to use them all the time:
Trade credit: suppliers agree to accept cash payment at a
given dat in the future failure to pay on time can create
problems for future orders. (short term under 1 year)
Own savings: most small business are set up with the owners
savings they are interset free but will be lost if the fails
banks will not provide aloan or overdraft unlesss the
owners are sharing the financial risk.
Sole trader
 Sole Traders are individual people that runs their own
business. As they are individual business sole Traders
can keep all the profits they make, they are also
responsible for anything that happens in the business.
The lost and profit is both left to them. Sole Traders
have unlimited liability, so if the business would go
bankrupt then the owner goes bankrupt as well.
Sole Trader
Types of owner ship
Sources of finance
Sole trader
Friends and family External: they can
start of their business by barrowing money
from friends and family to start up the
business. This is a medium term because the
friends and family might run out of money
and would no longer able to support it.
Personal savings Internal: this could be the
savings a person had to start up their
business they could use this saving in
starting them off. This is a short term
because the owner will run out of their
personal savings soon there for this is up to 6
months
Bank loans: this is a long term because the bank
can offer the owner loans it will help the owner to
support his/her sole trader business. This is a long
term of up to 25 years.
franchise
 A Franchise is not a business ownership but someone
who has paid to become part of an established franhise
business (such as McDonalds, Subway) .A franchise
could set up their own business it doesn’t matter about
the type of ownership all they have to make sure of is
that they agree on the contract to the Franchisor. The
Franchisor provides training, advertising premises and
support for the franchise.
Types of ownership
Sources of finance
Franchise
Loans: If you get a loan and decide to
get a franchise business then you would
pay that off by the money that the
company gives you and you could
decide how much you want to pay if off
by, if it 5 years or 10 years.
Trade Credit: this is a short term , trade
credit means when you buy goods or
services on acount e.g. buy something
and not making immediate payments.
PRIVATE LIMITED COMPANY (ltd)
 This is a small family business and there must be at
least two shareholders but how ever there is no rules
on maximum number. The business has limited
liability. The shareholders in private limited company
cannot sell or transfer their shares without offering
them first to the other shareholders for purchase.
Types of ownership
Sources of finance
Private Limited Company (LTD)
Shares: If you are going to use the
businesses shares then you need to make
sure that nothing goes wrong when you will
be spending that money otherwise you could
lose the entire business if something goes
wrong.
This is a long term because the investors has
to stay with the business for quite a while.
Bank loans: this is a long term this willl last
for couple of years but have to be paid back.
Family and friends: they could
always look up to their friends and
owner and expect some help from
them however they will not always be
in credit to help them out.
Financial Performance
 A personal measure of how well a firm can use assets
from its primary mode of business and generate
revenue. This term is also used as a general measure of
a firm's overall financial health over a given period of
time, and can be used to compare similar firms across
the same industry or to compare industries or sectors
in aggregation.
Budget and Cost
 Budget= A budget is a target for costs or revenue that a
firm or department must aim to reach over a given
period of time. Budgeting is like sitting a goal it is a
technique for turning a firms strategy into reality.
 Costs = costs are critical elements of the information
necessary to manage a business succesffully. Cost are
divided into 3 categories: Variable costs, Fixed Costs
and semi fixed costs.
Why business needs to control
costs and manage budgets.
 There is a lot of requirements to make a certain
amount of profit. There are bank requirement,
shareholders requirements, and it can even affect
relationships with customers. Controlling costs is part
of budgeting and the total sales, minus the costs gives
you the profit.
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