Business Finance

Needs and Sources

Functions / Roles of Finance Department of
an organization
• Recording all financial transactions, such as payments and sales
revenue
• Preparing final accounts
• Producing accounting information for managers
• Forecasting cash flows
• Making important financial decisions e.g. which source of capital
to use for different purposes within the business.

Why Businesses need Finance ?

• May need to start the business
• May need for expansion purpose
• May want to increase the working capital
A capital expenditure is an amount spent to acquire or
improve a long-term asset such as equipment or
buildings. Usually, the cost is recorded in an account
classified as Property, Plant and Equipment

A revenue expenditure is an amount that is expensed

immediately Routine repairs are revenue
expenditures because they are charged directly to an
account such as Repairs and Maintenance Expense
 Internal source of
Finance

Retained Profit Sale of existing Asset Sale of Inventory Owner’s Saving

Smart use of Tied

No repayment Capital
Reduce Storage Readily Available
No interest Cost Don’t increase debt Cost
level No interest Cost

Not for new & Small

Business May take some time May not be sufficient
Minimum Stock Level Increase the Risk of
Reduce distributable Not for new business
Profit Owner
 ISSUE OF SHARE

Share capital is the money invested in a

company by the shareholders. Share capital is a
long-term source of finance. In return for their
investment, shareholders gain a share of the
ownership of the company.

Advantages Disadvantages

• Permanente source of Finance • Dividend are paid after the tax

• No interest cost • Shareholder expect Dividend
• Sold share may change in
ownership
 External Finance
Finance provided by the people or
financial institution ( banks) out side
business that require a payment

The most common form of external finance are the following

ISSUE OF SHARE BANK LOAN DEBENTURE

DEBT FACTORING MICRO FINANCE KICK STARTER

 BANK LOAN

A bank loan is the most common form of finance for a business. A

bank loan provides medium or long-term finance. The bank sets the
fixed period over which the loan is provided (e.g. 3, 5 or 10 years),
the rate of interest and the timing and amount of repayments.

Advantages Disadvantages

• Quicker to arrange • Have to be repaid

• Varity in terms of size and time to repay • Borrowing Cost
• Size of the firm may have advantages • Security or collateral
 an unsecured loan certificate issued by a
DEBENTURE company, backed by general credit rather
than by specified assets.

Advantages Disadvantages

• Can help to raise loan for longer • Have to be repaid

period of time • Borrowing Cost
• Low interest rate
DEBT FACTORING The is when a business sell off their debts to
raise the short term finance

Advantages Disadvantages

•Immediate cash injection •Have to sell it lower than its

•Risk of bad debt is reduced value the debt
 Microfinance is a type of banking service that is
MICRO FINANCE provided to unemployed or low-income
individuals, or groups who otherwise have no
other access to financial services.
MICRO FINANCE
 Finance
Short (Loans) Long
Term Term
 SHORT TERM FINANCE

This provides the working capital needed by businesses for day-to-day operations.
Shortages of cash in the short term can be overcome in three main ways.
Short term Finance is usually required for the day-to-day running of a business
and is usually settled within a financial year

Here are the most common methods of raising short term Finance

DEBT
OVER DRAFT TRADE CREDIT
FACTORING
 The bank allows the business to draw
OVER DRAFT
more money from their bank account
than they actually have in it.

Advantages Disadvantages
• Quick to Arrange it • Only suitable for a smaller amount
• Interest only for the amount overdrawn • Usually has to be repaid within short
• Considered a good short term solution time
to cash flow problem • Usually carry higher interest rate than
loan
 Trade credit is the credit extended to the Business by
Trade Credit suppliers who let you buy now and pay later. Any time
Business receive delivery of materials, equipment or other
valuables without paying cash on the spot, it is considered
as using trade credit.

Advantages
• It is Equivalent to a loan from supplier
as usually carry no interest
• Business can use the credit
Disadvantages
• May not be able to get discount on
prompt payments
• The supplier may refuse to supply any
more goods if payment is not made
quickly or on time.
 LONG TERM FINANCE

Long term source of finance are those that are required over longer period of
time usually more than a year and may have many reason like expansion . The
Businesses has the choice of raising long term finance either by borrowing or
through issue of shares
NEW
Here are the most common methods of raising long term Finance
ISSUE

BANK LOAN HIRE PURCHASE ISSUE OF SHARE

RIGHT
LEASE DEBENTURE ISSUE
Sources of finance: how business makes the choice

Purpose & Time

SIZE OF LOAN LEGAL FORM & SIZE
Period

LEVEL OF
CONTROL OF
BORROWING/
BUSINESS
GEARED ?