Sales of assets.
Established companies often find that they have assets that are no longer fully employed. These could
be sold to raise cash. In addition, some businesses will sell assets that they still intend to use, but which
they do not need to own. In these cases, the assets might be sold to leading specialists and leased back
by the company. This will raise capital, but there will be an additional fixed cost in the leading and rental
Reduction in working capital
When businesses increase stock levels or sell goods on credit to customers, they use a source of finance.
When companies reduce these assets – by reducing their working capital – capital is released, which acts
as a source of finance for other uses.
Internal sources of finance – an evaluation
This type of capital has no direct cost to the business if assets are leased back once sold, there will be
leasing charges. Internal finance doesn´t increase the liabilities or debts of the business, and there is no
risks of loss of control by the original owners as no share are sold.
External sources of finance
Short – term sources
This means that the amount raised can vary from day to day, depending on the particular needs of the
business. The bank allows the business to “overdraw” on its account at the bank by writing cheques to a
greater value than the balance in the account. This overdrawn amount should always be agreed in
advance and always has a limit beyond which the firm should not go. Business may need to increase the
overdraft for short periods of time if customer’s don´t pay as quickly as expected or if a large delivery of
stocks has to be paid for.
This means when suppliers provide goods without receiving immediate payment and this is the same as
“lending money”. These process of “lending money” is not free because discounts and supplier
confidence is lost.
This means selling of claims over debtors to a debt factor in exchange for immediate liquidity – only a
proportion of the value of the debts will be received as cash. Overdraft – bank agrees to a business borrowing up to an agreed limit as and when required.
Factoring - selling of claims over debtors to a debt factor in exchange for immediate liquidity – only a
proportion of the value of the debts will be received as cash.
Sources of medium – term finance
Hire purchase – an asset is sold to a company that agrees to pay fixed repayments over an agreed time
period – the asset belongs to the company.
Leasing – obtaining the use of equipment or vehicles and paying a rental or leasing charge over a fixed
period. This avoids the need for the business to raise long – term capital to buy the asset. Ownership
remains with the leasing company.
Long – term finance
Long term loans – loans that don´t have to be repaid for at least one year
Equity finance – permanent finance raised by companies through the sale of shares.
Long-term bonds or debentures;
Long-term bonds or debentures: bond issued by companies to raise debt finance, often with a fixed
rate of interest.
A company wishing to raise funds will issue or sell such bonds to interested investors. Company agrees
to pay a fixed rate of interest each year for the life of the bond, which can be up to 25 years. Long-term
loans or debentures are usually not secured on a particular asset to gain repayment, the debentures are
known as mortgage debentures.
Sales of shares-equity finance;
All limited companies issue shares when they are first formed. Capital raised will be used to purchase
essential assets. Sell shares to the wider public means potential benefits for a business. Also there’s a
risk of the loss of control over the business by the stakeholders. This can be done by two ways:
Obtaining a list on the Alternative Investment