BUSINESS MANAGEMENT

3.1. SOURCES OF FINANCE

TYPE OF FINANCIAL SOURCE BENEFITS ABOUT USING IT

I believe that the best part of using retained profits as a source of finance is that there are no legal
formalities or interests payments involved as they are an internal source, so they are cheap and do
not increase corporate debt. In addition, they are very flexible as the owners have full control and
Retained profits decision-making power over them and on how they are reinvested, as those are the business own’s
funds. Moreover it allows the business to keep their ownership as retained profits do not involve
selling the business ownership. Those result to be useful and effective as they increase the
business’s liquidity which assures stability because it provides funds if any emergency or scandal
arisies and makes it possible for the corporation to recovery without borrowing funds.These are the
reasons why it is considered the most important and significant source of finance for profitable
businesses.
The main benefit of the sale of assets is that it allows the business to sale the assets that are no
Sale of assets longer productive or employed and raise fast and cheap cash, which can be used to invest in new
productive and more efficient assets. Moreover, this allows the business to lower their fixed costs and
reduce their debt or liabilities.

One of the advantages of reducing the working capital is that the business releases capital to further
Reduction in working invest in innovation and the development of other activities or working needs in a short-term time
capital period. In addition, due to the flexibility of this source of finance, it helps businesses to quickly get
capital when a fluctation or problem in the cashflow. Less working capital enables efficient daily
operations and and more funds available for long-term undertakings and is a sign of the business’s
healthiness.

The main benefit of equity financing is that the business doesn’t have to make a monthly loan payment
to shareholders, which is important when a business doesn’t initially generate a profit as it does not
Share issue / sell of increase their debt; and in return, the company has more capital available to invest in growing the
shares (Equity finance) business. Additionally, there is not required to return the investment if the business does not generate
profit at all, so that gives the business sense of tranquillity. Besides, the business benefits from
permanent finance and the experience and knowledge of the shareholders.
Firstly, debentures guarantee fixed and regular interests paid, which makes them more secure and
less risky for investors and the business is able to make more accurate financial plans and reduce
Debentures their debt. The control of the owners over the business is not reduced, and profit sharing with
shareholders remains in the same proportion, as the debenture holders do not have voting rights over
the business. The use of debentures encourages long-term funding to grow a business. It is also
cost-effective when compared with other sources of finance. Debentures are interesting when looking
for diversification, as the finance of the business does not only depend on a bank.
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3.1. SOURCES OF FINANCE

Long-term loans allow businesses to purchase or invest in assets paying for them over time, that
Long-term loans otherwise would not be affordable for businesses. This is important for starts-up or small to medium
businesses how do not have capacity for initial high investments. Indeed, those have lower interests’
rates than other sources of finance. Moreover, banks do not take any ownership of the business, to
the business is able to keep the overall control. On top of that, the interests on bank loans are tax-
deductive-which is helpful and beneficial for the business when the payment of taxes as interests are
not included. Usually those interests are fixed which makes it easy for businesses to budget and plan
for monthly loan payments. Additionally large amounts can be borrowed.

Grants result to be a very attractive source of finance because they provide capital for the business
Grants and it does not need to be repaid, so they are essentially free cash. In addition, they help businesses
to grow or develop a specific idea or business activity. The owners of the company do not lose control
or decision-making power over the business. Furthermore, those grants can be seen as awards,
which provide visibility, prestige and credibility to the business.

Venture capital financing allows small business and starts up to benefit from the organization’s
expertise and experience, and provides guidance and support to the business when taking financial
Venture capital decisions which is very important to enable the business faster and successful growth. Accepting the
risks of their power and control over the business, they will provide fast finance and constant
operational and financial advice. More than that, it introduces the business to a network of strategical
partners for the business further expansion.

Using angel investors as a source of finance, helps to provide valuable knowledge, guidance, expert
Business angels support on the decision-making and potential contacts to the business. Their flexibility and risk-taking
personality makes it easier to get finance to get the business established. In addition, the invested
capital does not have to be paid back to the angel investors in case of business’s failure, which makes
this source of finance less risky.

Subsides help to prevent business’s long-term failure. In addition, those one of the most economical
Subsidies sources of finance as those are given for free as long as the business is committed with some social
responsibilities. Furthermore, subsides encourage business’s ethical performance and encourages
businesses to contribute or take care of the society and environment or to promote employment
creation as they know that they could be financially benefited from it.
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3.1. SOURCES OF FINANCE

Microfinance funding, through small loans gives access to start ups, very small businesses or
Microfinance foundations with poor credit usually ran with social objectives who lack of capabilities for high
investments and have low chances of success. Through microfinance, those businesses are able to
raise the needed capital for their activities to remain competitive and grow. Additionally, they provide
more stability and prosperity for the business.

Leasing’s principal advantage is that there is not a high initial investment as the payment is spread
out through a period of time, which helps the business to maintain a steady cash-flow and it releases
capital for the business to fund its other working capital needs and investments. Additionally, leasing
Leasing has a fixed rate of interests’ payments, which is good to establish an efficient financial and expenses
plan for the business as it provides them certainty. Throughout leasing, businesses have the
opportunity to invest in quality assets, which might be an unaffordable or expensive purchase.
However, at the end of the leasing period, the business has the opportunity to purchase on the asset
if they want to, which gives them flexibility.

The main advantage of renting is that the business does not own the asset, which gives them a lot of
freedom and flexibility of relocation and renting its assets depending on their interests and
Renting capabilities, so they are not very risky investments. Besides, the business is able to save some
money, as it does not have to make a high initial full payment for its property, which enables the
business to spread the cost over a longer period of time and be able to make other investments within
the business. In addition, the responsibilities among the asset are lower when renting rather than
purchasing.

A hire purchase is beneficial because it allows the payments to be spread out over time to make the
Hire purchase purchase affordable for the business. In addition, there are fixed interest rates, which give tranquillity
and certainty to the business, and helps to establish accurate and efficient financial forecasting and
budgets much easier. Hire purchasing is a simple way of financing and easy to obtain and gives
businesses the opportunity to use higher quality assets.

An advantage of medium-term loans is that the money borrowed is returned through sets of monthly
payments, which allows a business to make higher investments and better control and budget their
fixed costs. Another benefit of this source of finance is that they have fixed interests rates, which
Medium-term loan enables the business to know exactly what the loan is costing them. All the terms and conditions of
the medium term loan are previously resolved before the agreement, which provides certainty and
tranquillity to the business.
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3.1. SOURCES OF FINANCE

A bank overdraft is useful for businesses because they are highly flexible: it enables the business to
only borrow any quantity of capital when they need it at the time required which in return, makes it
Bank overdraft cheaper than other sources of finance. Another great benefit of this source is that there are hardly
any restrictions regarding the business purpose to acquire them, including working capital expenses,
tax demands, supporting uneven cash flow, funding innovation or even providing access to
emergency funding in times of emergency.

Asking for a short-term loan is an easy and fast way to acquire capital. The money borrowed is
Short-term loan returned through sets of monthly payments, which allows a business to make higher investments and
better control and budget their fixed costs. Compared to long-term loans, the total payment of interest
paid is significantly lower and less risky as the period of time involved is shorter. Nevertheless, the
ownership of the business is not reduce.

Creditor’s principal advantage is that they provide business competitive advantage over its
Creditors / Trade credit competitors and to powerfully stand out. The business is able to buy its suppliers supplies without
having to pay immediately for their purchases and with no rates of interests involved. That it is to say
that suppliers finance their inventories without the payment of interests.

Factoring reduces the debtor’s expenses by overtaking them which provides a quick increase in the
Factoring cashflow. In addition, it regularizes the business’s cash flow, increases the working capital and it
provides immediate liquidity, which is a benefit for the business as it increases the business’s ability
to pay its short-term debts making its financial structure stronger. Factoring makes it possible for a
business to finance its operations from its own receivables.
 BUSINESS MANAGEMENT
3.1. SOURCES OF FINANCE