FAM Session 2 Source Of Finance Essays

Submitted By sunsilk80
Words: 645
Pages: 3

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Sources of Finance

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Sources of Finance

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Business Growth

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Internal Sources of Finance and Growth






Selling more? Mind the queues.
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‘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?
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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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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

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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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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
– Overdraft limit – the maximum amount allowed to be drawn - the firm does not have to use all of this limit
Trade credit – Careful management of trade credit can help ease cash flow…