Sources of finance
Introduced| English | Meaning |
|---|---|
| retained profit/rɪˈteɪnd ˈprɒfɪt/ | Profit kept in a business after distributions to its owners. |
| interest/ˈɪntrest/ | A payment for borrowing money or a return earned by lending or depositing it. |
| share issues/ʃeə ˈɪʃuːz/ | The creation and sale or allocation of new shares by a company. |
| grants/ɡrænts/ | Funds provided for a specified purpose that generally do not have to be repaid if the relevant conditions are met. |
| trade credit/treɪd ˈkredɪt/ | An arrangement in which a supplier allows a business to receive goods or services before paying for them. |
| overdrafts/ˈəʊvədræfts/ | Amounts by which withdrawals or payments exceed the available balance in a bank account, leaving money owed to the bank. |
| mortgages/ˈmɔːɡɪdʒɪz/ | mortgages |
| debt/det/ | An obligation to repay money or other resources owed to another party. |
| equity/ˈekwɪti/ | The owners' residual interest in a business's assets after liabilities are deducted. |
| diluted/daɪˈluːtɪd/ | diluted |
Where the money comes from
- Needing finance is one thing; getting it is another. A start-up and a global plc have very different options.
- The right source depends on the amount, the purpose, and the cost.
Sources of finance lab
Choose the best type of finance by time, risk and ownership.
Which is an internal source of finance?
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Retained profit comes from within the business.
Internal vs external
- Internal sources: retained profit 留存利润, selling assets, tighter working capital. No interest 利息, no loss of control.
- External sources: from outside the business — loans, share issues 发行股票, grants 补助金, trade credit 商业信用.
Sources of finance are internal or external
Which is a short-term source of finance?
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Overdrafts and trade credit are short-term.
A long-term asset should be funded with a ______-term source of finance.
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Match the term of finance to the purpose.
Short-term vs long-term
- Short-term: overdrafts 透支, trade credit — for day-to-day cash needs.
- Long-term: bank loans, mortgages 抵押贷款, share issues — for big, lasting investments.
Banks are a key external source of finance, through loans and overdrafts
A drawback of raising finance by issuing shares (equity) is that it:
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Equity dilutes ownership and control, though it needs no repayment.
A bank loan (debt) must be repaid with interest, but lets owners keep control.
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Debt keeps control but adds a repayment obligation.
Debt 债务 vs equity 所有者权益
- Debt (loans): must be repaid with interest, but the owners keep control.
- Equity (selling shares): no repayment, but ownership and control are diluted 稀释.
Match the source to the need. Funding a long-term asset with a short-term overdraft is dangerous; financing daily wages with a 20-year loan is wasteful. The source's term should fit the purpose.
You've got it
- internal sources (retained profit) cost nothing extra; external sources come from outside
- short-term (overdraft, trade credit) vs long-term (loans, shares)
- debt keeps control but needs repaying; equity needs no repayment but dilutes control
Write from retained profit of 25000
- A firm can fund a project with 25000 of retained profit or with a loan of the same amount.
- Say what the retained profit does not require.
A firm needs 25000. It can use retained profit or borrow 25000. What extra cash cost does the retained profit avoid, and what does a new share issue do to control?
Internal profit is already the firm's money.
What extra repayment does retained profit of 25000 require?
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Retained profit is an internal source.