Financing the Enterprise

1
Financing the Enterprise

• Businesses need finance in the short term (why?)
  and in the long term (why?).
• Sources of finance are many and vary according to
  the type of firm and nature of capital required.
• Personal loans self-financing
• Often the method for sole traders/partnerships.
  It relies on ones own savings as well as loans
  from friends and family.
• Bank Loans
• Bank loan The bank gives the business a sum of
  money, which it pays back in instalments with
  interest. Usually require some form of security.
• Overdraft Business can overdraw this amount by
  an agreed sum.
• Share issue
• Main source of funds for large firms (external).
  It is however, very costly. It can be done in 3
  ways 1) Public issue 2) Offer of sale 3) Rights
  issue

2

• INSTITUTIONAL SOURCES OF FINANCE
• Insurance companies Part of the money paid in
  insurance premiums is made available for
  investment in industry. Insurance companies are
  one of the largest institutional investors.
• Pension funds These are used as a source of
  capital for government and industry.
• Building societies Provides funds exclusively
  for investment in buildings! Mostly for hose
  purchase.
• Investment Trusts All these companies do is hold
  shares in other companies. Full time experts in
  investment, buy shares (therefore investing in
  the company) and receive income in the form of
  dividends.
• Unit Trusts Very similar to above, but are for
  the smaller saver.
• Savings Banks e.g. Post Office. Millions of
  people save in them, and the funds are then
  channelled to the government and other public
  authorities.
• SUMMARY (methods of finance)
• Retained profit after tax profit (? in
  dividends)
• Share issues
• Debentures
• Medium long term loans
• Short term loans
• Mortgage loans
• Sale leaseback
• Hire purchase
• Overdrafts
• Venture capital