gvy

Capital Expenditure: Money spent to acquire fixed assets in  usiness (machines, land, building).

Revenue Expenditure: Money used in the day-to-day running of a business. Daily payments or expenses (rent, wages, raw materials, insurance).

Internal sources of finance: Money obtained from within the business

Personal funds/savings: A source of finance for sole traders that comes mostly from their own personal savings. 

Retained profits: Profit that remains after a business has paid a corporation tax to the government and dividends to shareholders.

Sale of assets: When a business sells off its unwanted or unused assets to raise funds. 

Managing of working capital: Good management = Less money spent. 

External sources of finance: money obtained from sources outside the business (institutions or individuals). Disadvantages: Pay interest and you might have to provide collateral (security). Advantages: quick

Debt factoring: a financial arrangement where the debt factor takes on the responsibility for the collecting and provides the business with a percentage of the owed debt in cash. The debt factor may immediately pay the business between 80 and 90 percent of the money owed and then proceed to collect the full amount from these debtors. The remaining 10 to 20 percent of sales revenue is the debt factors profit. It has the advantage that the business receives  immediate cash that it can use, plus, the risk or responsibility of collecting the debt is passed on to the factor. The disadvantages are that the business loses a percentage of its profits and the business may risk losing a loyal customer if the debt factor uses harsh means of collecting debts. 

Overdrafting: when a lending institution allows a firm to withdraw more money that it currently has in its account. Interest is charged only on the overdrawn amount. This provides an opportunity for firms to spend more than they have in their account, helping them to get rid of short-term debts . It is a flexible form of finance and is cheaper than a loan capital. Banks can cover a firm’s cheques to prevent them from bouncing.

Trade Credit: An agreement between businesses that allows the buyer of goods or services to pay the seller at a later date. No immediate cash transaction is done at the time of trading. The credit period offered by most creditors usually lasts from 30 to 90 days.  An advantage of this is that by delaying payments to suppliers, businesses are left in a better cash-flow position that if they paid immediately. It is an interest-free means for the length of the credit period. A disadvantage is that debtors lose out on the possibility of getting discounts received by paying cash. 

Bank Loan (loan capital): Iit is the money sourced from financial institutions (banks). Interest is charged on the loan to be repaid, these repayments are spread evenly until the full amount (initial + interest) is paid. The interest can be fixed(remains fixed for the entire term of the loan repayment) or variable(changes periodically based on the prevailing market conditions). The advantages of loan capital are that it is accessible and can be arranged quickly for a firm’s specific purpose. Owners still have full control of business (no shares are issued). A disadvantage is that the failure to pay the loan may lead to seizure of a firm’s assets.

Leasing: A source of finance that allows a firm to use an asset without having to purchase it by cash for a certain period of time.  An advantage of leasing is that the firm doesn’t need to have a high initial capital outlay to purchase the asset. The lessor takes on the responsibility of repair and maintenance of the asset. But, leasing can turn out to be more expensive than the outright purchase of an asset due to the accumulated total costs of the leasing charges. 

Hire purchase: Allows a business to pay creditors in instalments(cuotas). The assets is legally the property of the creditor until all payments have been made. If the buyer defaults on payments or falls behind, the creditor can repossess the asset.

Loans

Business Angels: Affluent individuals who provide financial capital to small start-ups or entrepreneurs in return for ownership equity in their businesses. They invest in high-risk businesses  that show good potential for future growth. An advantage is that they give more favorable financial terms than other institutions. The disadvantage is that angel investors will have control of ownership in the businesses they

Individual investors: Advantages: More favorable financial terms. Provide knowledge and personal experience to the business. Easier to make investment decisions without difficult assessments. Disadvantages: Share ownership. Can be difficult to convince investors and get their trust.

Venture Capital: Financial capital provided to high-risk, high- potential start-up firms or small businesses. They usually fund start-ups that find it difficult to access money from other financial institutions. They own a stake in the business they invest in, with the aim of receiving future profits and are involved in the firm’s decision-making. High risk, expect the business to create a thorough researched business plan. The disadvantage is that venture capitalists may set very high profit targets for the start-up businesses.

Debentures: Advantage: The interest arranged are less than to a bank. Disadvantages: Documents issued so investors can buy and they will receive interest and the repayment of the money they invested.

Loan Capital: Disadvantages: Mortgage: House/building is the guarantee that the company will pay back loan. Not available for all businesses. Bank might ask for collateral. Pay interest.

Issue shares: Limited company. Advantage: Don’t need to pay interest.Disadvantages: Lose control of business, Very expensive.

Other forms of finance:

Grants: Funds usually provided by a government. Businesses will be expected to write a proposal showing how they plan to use the money. An advantage of grants is that they don’t have to be paid back.

Subsidies: Financial assistance granted by a government, a non- governmental organization (NGO), or an individual to support business enterprises that are in the public interest. The aim is to lower the market price.