HSC Business Studies - sources of finance

1. Sources of Finance

2. Internal Sources
Retained
Profits
As 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.

3. External Sources
• Debt – short-term borrowing
▫ Overdraft
▫ Commercial bills
▫ Factoring
Debt refers to funds borrowed
from external sources.

4. 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.

5. 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.

6. 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.

7. 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

8. 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.

9. 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.

10. 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.

11. 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.

12. 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.

13. 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.

14. 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.

15. 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.

16. 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.

17. 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