Finance sources of Finance

Finance Sources of Finance

Internal Sources Retained profit/working capitalFamily and friendsCut down stock levelsPersonal Capital/Owners funds

External Sources Long termSharesDebentures Long term bank loansGrantsMortgageGovernment GrantsMedium termHiring and LeasingHire purchaseShort termBank OverdraftShort Bank LoanCreditorsTrade Credit

Retained Profit

AdvantagesThey are cheap.They are very flexible.They do not dilute the ownership of the company.

DisadvantagesDanger of hoarding cash.Shareholders may prefer dividends id the business is not earning a sufficient ROCE.High profits and cash flow would suggest the business could afford debt (higher gearing).

Advantages  Personal savings and other assets make a great source of capital. You already have them.Acquisition costs are minimal. You won't be paying interest on a bank loan or sharing returns with investors.

Owners funds 

Disadvantages If you plough your personal savings into a business venture, you could lose it all. Some assets, such as retirement accounts, are safe from creditors and bankruptcy courts; placing such assets at risk may not be good  .

Bank Loan

AdvantagesA bank loans money to a business based on the value of the business and its perceived ability to service the loan by making payments on time and in full. Banks do not take any ownership position in businesses. Bank personnel also do not get involved in any aspect of running a business to which a bank grants a loan.Once a business borrower has paid off a loan, there is no more obligation to or involvement with the bank lender unless the borrower wishes to take out a subsequent loan.

DisadvantageVery difficult to obtain. Banks are careful to lend only to businesses that can clearly repay their loans, and they also make sure that they are able to cover losses in the event of default. Personal assets can be seized in the event the business fails and is unable to repay all or part of a loan.

Overdraft

AdvantagesTimely PaymentsLess PaperworkFlexibilityBenefit in Interest Cost

DisadvantagesHigher Interest RateRisk of Reduction in LimitRisk of SeizingDebtors Collection becomes Lethargic

Mortgage

AdvantagesLikely to be similar to or less than a rental payment on the same property.Monthly repayments will be predictable.You aren't exposed to any sudden, large rent increases. Interest payments on a commercial mortgage are tax-deductibleany gain in value of the property will increase your capital.May be able to extend your existing premises, avoiding relocation costs.You have control over what alterations you want to make to the premises.

DisadvantagesUnlike renting, you'll need to come up with a substantial deposit If you own premises, you may find it harder to relocate If you have a variable rate mortgage, you are exposed to increases in interest rates.Owning a property means you'll be responsible for factors such as maintenance, fixtures and fittings, insurance, decoration and security.Any fall in the value of the property will decrease your capital.

Trade Credit

AdvantagesIt is easy and automatic source of short-term finance. It reduces the capital requirement. It helps the business focus on core activities. It does not require any negotiation or formal agreement.

DisadvantagesTrade credit is available only to those companies that have a good track record of repayment in the past.For a new business, it is very difficult to finance working capital through trade credit.It is very expensive, if payment is not made on the due date.

Government Grants

AdvantagesThey can provide huge monetary rewards with just one proposal. Some government grants can total in the millions of dollars. Those who receive government grants find it easier to raise money from other government and private sources. These grants can be prestigious and give your organization instant credibility and public exposure.

Disadvantages Preparing government grant proposals usually require hard work and tons of research and planning.Government grants often come out with a set of rules for who are eligible to apply that can be so specific that it excludes many organizations.Tend to demand certain activities must be included in any project to be funded.Government grants are VERY competitive.Government grants come with quite a bit of regulation and red tape.

Hiring and Leasing

AdvantagesFlexibility of repayment structuring is available.Leasing prevents the risk of an asset’s value depreciating quickly. Provides flexibility to enter into a new contract at the end of the original lease’s fixed term.Financing asset purchases can be more tax efficient than standard-term loans.High accessibility of financing for businesses due to the financing being secured with the leased asset and the asset being owned by the financing company.In certain circumstances there is maintenance included within the terms of the agreement.

DisadvantagesTotal sum of capital payments for HP or leasing will be higher than the full payment on the asset purchase.Administrative complexity and costs will be greater if any covenants are applied to the arrangement. Early termination charges or restrictions on subleasing.

Hire purchase

AdvantagesOften you can choose a fixed term and a deposit that fit your budgetOften you can choose a fixed term and a deposit that fit your budgetSeasonal repayments are also often available which means that you can tailor repayments based on your income if it varies at certain times of year. The rate of interest and monthly payments are fixed throughout the duration of the agreementA large payment at the end of the contract, known as a 'balloon payment' can also be used to reduce the monthly instalments

DisadvantagesYou are in a fixed contract, and therefore if your financial situation changes during that period and you can’t afford the agreed monthly repayments, you may lose the asset.Overall, you will pay more for the asset, if compared to buying for “cash”, as you’re paying interest in addition to the cost of the product.