1. Topic 3 Finance and Accounts
3.1 Sources of Finance

2. The Role of Finance Capital Expenditure Revenue Expenditure
This money is spent to acquire items in a business that will last for more than a year and may be used over again.
Known as FIXED Assets-used to generate income for the business in the long-term
Can be used as collateral
Long Term investment intended to assist business to succeed and grow
This money is spent on the day-to-day running of the business
Expenses include rent, wages, raw materials, insurance, fuel.
Need to be covered immediately to keep business operational

3. Internal Sources of Finance
Definition: Money obtained from within the business and is usually from already established businesses. Sources include:
Personal Funds-Savings / Risky to sole traders
Retained Profit-profit that remains after a business has paid tax to govt. and dividends to shareholders
Sale of Assets-Businesses sell off its unwanted or unused assets to raise funds. Could include land, equipment. May adopt “sale and lease back” option.

4. Pros and cons of using retained profit
Cheap-does not incur interest charges
Permanent-does not have to be repaid
Flexible for any use
Owners have control without interference from banks, etc.
Start-ups doe not have retained profit because they are new
Retained profits might be low and insufficient
High retained profits might mean the shareholders are not earning dividends

5. External sources of finance
Share capital
Loan capital
Overdrafts
Trade credit
grants
Subsidies
Debt factoring
Leasing
Venture capital
Business angels

6. Share capital
Money raised from the sale of shares of a limited company

7. Loan capital (debt capital)
This money is from sourced from financial institutions such as banks.
Interest is charged on the loan
Fixed interest rate
Variable interest rate

8. overdrafts
When a lending institution allows a firm to withdraw more money than it currently has in its account.

9. Trade Credit
This agreement between businesses allows the buyer of goods or services to pay the seller at a later date.

10. grants
Funds provided by a government, foundation, trust, or other agency to businesses.
Businesses write a proposal for a specific need.
Ex: Bill and Melinda gates foundation

11. subsidies
Financial assistance granted by a government, NGO, or an individual to support business enterprises that are in the public interest.
Ex: farm subsidies
Subvention helps businesses to increase their demand fro goods by charging lower prices for their products.
Subsidies are not repaid. Political interference often occurs.

12. Debt Factoring
A business sells its invoice e to a third party known as a debt factor.
Buy for 80-90% of the invoice amount from the business and then take on the responsibility of collecting the debt.

13. leasing
A business (lessee) enters into a contract with a leasing company (lessor) to acquire or use particular assets such as machinery, equipment, or property.
Finance lease agreement-at the end of the leasing period , there might be an option to buy.

14. Venture capital
Capital provided by investors to high-risk, high-potential start-up firms or small businesses.
Usually provided to start-ups that find it difficult to access money from other financial institutions or capital markets.

15. Business Angels (Angel Investors)
Highly affluent individuals who provide financial capital to small start-ups or entrepreneurs in return for ownership equity in their businesses

16. 3.1 Part 2 Short, Medium, and Long-term finance
influencing factors on what source to choose

17. Short-term finance
short Term: usually paid within 12 months or a trading or financial year
Usually used for day-to-day operations
Examples: Bank Overdrafts, Trade Credit, Debt Factoring

18. Medium term finance Medium Term: usually has a duration of 1-5 years.
usually used to purchase assets such as equipment or vehicles that have a useful lifespan for a specific period of time.
Examples: leasing, bank loans, grants

19. Long term finance
Long term: the duration may be anywhere from more than 5 years to around 30 years.
May be used to purchase long-term fixes assets or other expansion requirements of a business.
Examples: long-term bank loans and share capital

20. Factors influencing the choice of a source of finance
Purpose or use of funds
Cost-consideration of “opportunity cost”
Status and size of business
Amount required
Flexibility
State of the external environment-consideration of externalities
Gearing-the relationship between share capital and loan capital (High Geared-risky)