Sources of finance include the following internal

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Sources of Finance include the following: Internal Sources External Sources From where the Business get the Finance?
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15 Internal Sources Traditionally, the major sources of finance for a limited company were internal sources: Personal savings Retained profit Working capital Sale of assets Internal Sources of Finance Retained Profit Working Capital Sales of Assets Personal savings Internal sources of funds Sale of assets - fixed assets that are not being used can be sold off to raise funds and develop more profitable ventures Sale and Leaseback - if the business still requires its fixed assets, it can sell them for a cash payment and then lease them back again to use
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16 Internal Sources of Finance and Growth ‘Organic growth’ – growth generated through the development and expansion of the business itself. Can be achieved through: Generating increasing sales – increasing revenue to impact on overall profit levels Use of retained profit – used to reinvest in the business Sale of assets – can be a double edged sword – reduces capacity? External Sources of Finance Long Term – may be paid back after many years or not at all! Short Term – used to cover fluctuations in cash flow ‘Inorganic Growth’ – growth generated by acquisition The existence of capital markets enable firms to raise long term loans and share capital.
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17 Long Term Shares (Shareholders are part owners of a company) Ordinary Shares (Equities): Ordinary shareholders have voting rights Dividend can vary Last to be paid back in event of collapse Share price varies with trade on stock exchange Preference Shares: Paid before ordinary shareholders Fixed rate of return Cumulative preference shareholders – have right to dividend carried over to next year in event of non-payment New Share Issues – arranged by merchant or investment banks Rights Issue – existing shareholders given right to buy new shares at discounted rate Bonus or Scrip Issue – change to the share structure – increases number of shares and reduces value but market capitalisation stays the same Long Term Loans (Represent creditors to the company – not owners) Debentures – fixed rate of return, first to be paid Bank loans and mortgages – suitable for small to medium sized firms where property or some other asset acts as security for the loan Merchant or Investment Banks – act on behalf of clients to organise and underwrite raising finance Government/EU – may offer loans in certain circumstances Grants
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18 Short Term Bank loans – necessity of paying interest on the payment, repayment periods from 1 year upwards but generally no longer than 5 or 10 years at most Overdraft facilities – the right to be able to withdraw funds you do not currently have Provides flexibility for a firm Interest only paid on the amount overdrawn
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