Purpose of business finance

Capital expenditure

To purchase fixed assets: properties and equipment; intended for business operations

Revenue expenditures

Payments for daily operations (direct and indirect costs)

Internal sources

Personal funds – savings, family, friends

Retained earnings – income after taxation and dividends

Sale of assets – selling of dormant or non-performing assets (liquidation)

External sources

Short term (0-12 months)

Business angels

Debt factoring

Donations

Government grants and subsidies

Hire purchases

Leasing

Overdrafts

Sponsorships

Trade credit

Venture capitalists

Medium term (1-5 years)

Business angels

Government grants and subsidies

Hire purchases

Leasing

Loan capital

Sponsorship

Venture capitalists

Long term (>5 years)

Business angel

Debentures

Government grants and subsidies

Hire purchase

Leasing

Loan capital

Share capital (preferred stock vs. commons stock)

Types of sources

Government grants

Difficult to apply for grants, as governments seek benefits from their spent cash (since this is not repaid)

Businesses can gain capital easily

Governments can benefit from the boosted economy

Venture Capitalists

Individuals who invest large amounts of money in startups for shares

Has some control over the business to guarantee return of investment

Venture capitalists guide the businesses, in it for the money (for profit)

Business angels

Individuals who invest large amounts of money in startups for shares

Not as involved in the decision making processes of the business

Can be risky as business may fail or their equity might be bought out

Businesses can raise capital easily while retaining control

For altruism

Crowdfunding

Soliciting funds from the general public

Businesses have to find ways to attract funding (e.g. incentives)

Businesses may not receive anything

Businesses can raise capital at little cost and can raise more than needed

Funders can receive incentives or opt to give only a little money

Sources of finance and business strategy

Purpose of finance (why is the money needed?) – will determine how long the financing should be

Cost (how much will it cost?) – cost of investment and cost to finance, including opportunity cost

Amount required (how much should be bought/spent?) – large volumes require cheaper financing

Time (how long before we pay?) – period needed to earn enough to pay back loan

Status/size of firm (are we big enough for the loan?) – large companies can get better deals and easier processing/approval

Financial strength (are we credible?) – credit record and gearing level are strong indicators of financial health

External factors – state of economy, interest rates, etc. have an impact of loan availability