Sources of Finance

Internal Sources

Retained ProfitsAs a business earns profits some of it is kept in the business, the rest is given to the owners. In the case of a company, the owners are shareholders who are paid a share of the profit in the form of dividends. The profit that stays with the business is called Retained Profits.

External Sources• Debt – short-term

borrowing▫ Overdraft▫ Commercial bills▫ Factoring

Debt refers to funds borrowed from external sources.

External Sources• Debt – short-term borrowing

▫ Overdraft▫ Commercial bills▫ Factoring

An overdraft is when banks allow accounts that are normally in credit to occasionally go below zero. A relatively high interest rate is charged so it should only be used for very short periods of time.

External Sources• Debt – short-term borrowing

▫ Overdraft▫ Commercial bills▫ Factoring

Commercial bills are issued by banks for 30-180 days and include promissory notes and bills of exchange which are basically contracts to pay back money loaned at a certain time.

External Sources

• Debt – short-term borrowing▫ Overdraft▫ Commercial bills▫ Factoring

Factoring is when a business sells its debt to another firm for a discount meaning accounts receivable becomes cash for a fee to save time in chasing payments.

External Sources• Debt – long-term borrowing

▫ Mortgage▫ Debentures▫ Unsecured notes▫ Leasing

A mortgage is when the lender supplies the funds and the borrower gives a form of security, often a portion of the value of a house. Due to the involvement of property a mortgage often involves large sums and due to the low risk, low interest rates

External Sources• Debt – long-term borrowing

▫ Mortgage▫ Debentures▫ Unsecured notes▫ Leasing

Debentures are issued by companies to the public and are secured with the company’s assets. They are for a fixed term and have regular fixed interest payments.

External Sources

• Debt – long-term borrowing▫ Mortgage▫ Debentures▫ Unsecured notes▫ Leasing

Unsecured notes are issued by companies to the public and are only secured with the company’s reputation. Like debentures, they are for a fixed term and have regular fixed interest payments.

External Sources• Debt – long-term borrowing

▫ Mortgage▫ Debentures▫ Unsecured notes▫ Leasing

Businesses may reduce the amount of money tied up in assets such as cars by selling them and leasing them back.

External Sources

• Equity – ordinary shares▫ New issues▫ Rights issues▫ Placements▫ Share purchase plans

Ordinary shares are issued to part-owners of a company which entitles them to a share of profits in the form of dividends.

External Sources

• Equity – ordinary shares▫ New issues▫ Rights issues▫ Placements▫ Share purchase plans

New issues of shares usually occur when a company first lists (or ‘floats’) on the ASX in an Initial Public Offering (IPO) through a prospectus.

External Sources

• Equity – ordinary shares▫ New issues▫ Rights issues▫ Placements▫ Share purchase plans

A rights issue invites existing shareholders to invest in more shares according to the number of shares they hold and must occur before any new shares are offered to the general public.

External Sources

• Equity – ordinary shares▫ New issues▫ Rights issues▫ Placements▫ Share purchase plans

A placement is inviting certain targeted investors to buy shares in the company. It is a quicker way of raising funds than through rights issues.

External Sources• Equity – ordinary shares▫ New issues▫ Rights issues▫ Placements▫ Share purchase plans

Share purchase plans (SPPs) are like rights issues in that they are offered to existing shareholders but on a maximum value per shareholder instead of per share.

External Sources

• Equity – private equity

Private equity involves selling shares to private investors rather than to the general public and hence the company is not listed on the stock exchange.

Picture Sources• Profit: http://www.flickr.com/photos/68751915@N05/6551525739/

• Debt-stone:

http://www.flickr.com/photos/iandavid/179416400/sizes/s/in/photostream/ by

Ian David

• Debt-eraser: http://www.flickr.com/photos/alancleaver/4105722502/ by Alan

Cleaver

• asx: http://www.flickr.com/photos/publik16/2928248284/ by publik16

• private equity:

http://www.flickr.com/photos/globalgamejam2009/5861200469/ by

GlobalGameJam2009