Sources of Funds1.Fundsâ¢money needed to establish grow and operate businessâ¢it is divided into 2 categories, internal sources such as equity finance and external sources such as debt finance2.Internal sources/Equity financeâ¢the money the owner has provided to the businessâ¢comes from owner's equity/retained profitsâ¢owner's equity is the owner's contributionâ¢retained profits is the money kept by the business after it has paid off its taxes3. External sources/Debt financeâ¢money obtained from people other than the ownersâ¢it is divided into short term/long term/other sources of fundsa)Short term borrowings - debts that will be repaid within a yearâ¢overdraft - an agreement between a commercial bank and business that allows a business's cheque account to go into a deficit to a limitâ¢bank bill - simply a written instruction to repay a sum of money by a certain date. The bank does not provide the money, the investors provide the money to the business and the bank is the guarantor whom provides security that the money will be repaid.
b)Long term borrowings - debts that will take between 5-25 years to repayâ¢Mortgage - a secured loan used to fund the purchase of property. Property cannot be sold until all borrowings are repaidâ¢Debentures - finance supplied by the general public for a fixed interest rate. Debentures are subject to government regulationc)Other sources of fundsâ¢Leasing - the payment of money for the use of equipment owned by another party. It is divided into 2 categories, operational lease and financial lease. Advantages: no upfront payment, payments are flexible and tax deductibleâ¢Factoring - sale of customer debt/accounts receivable to a financier at a discounted rateâ¢Venture capital - finance supplied by private investors/venture companies for a risky business that has potentialâ¢Grants - non-repayable financial benefits supplied by government agencies or private businesses.
- Financial considerationsâ¢Matching principle - ensure...