2.3 Sources of Funds + Business Summaries

Essay by maryyHigh School, 12th gradeB+, April 2008

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Sources of Funds1.Funds•money needed to establish grow and operate business•it is divided into 2 categories, internal sources such as equity finance and external sources such as debt finance2.Internal sources/Equity finance•the money the owner has provided to the business•comes from owner's equity/retained profits•owner's equity is the owner's contribution•retained profits is the money kept by the business after it has paid off its taxes3. External sources/Debt finance•money obtained from people other than the owners•it is divided into short term/long term/other sources of fundsa)Short term borrowings - debts that will be repaid within a year•overdraft - an agreement between a commercial bank and business that allows a business's cheque account to go into a deficit to a limit•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 repay•Mortgage - a secured loan used to fund the purchase of property. Property cannot be sold until all borrowings are repaid•Debentures - finance supplied by the general public for a fixed interest rate. Debentures are subject to government regulationc)Other sources of funds•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 deductible•Factoring - sale of customer debt/accounts receivable to a financier at a discounted rate•Venture capital - finance supplied by private investors/venture companies for a risky business that has potential•Grants - non-repayable financial benefits supplied by government agencies or private businesses.

- Financial considerations•Matching principle - ensure...