Get unlimited access to GCSE tutors' videos and online review here for £ 19.99: when choosing finance for a company, it's essential that it be suitable for the needs of the company. For example, making sure that it is actually enough to pay for what you need. It is also important that it is appropriate and will not leave the business with massive interest payments if it is already loaded with other high monthly payments.
Finances can come from internal or external sources. If it comes from internal sources, it is likely to come from three sources; retained earnings from previous years after all deductions, sale of assets such as machinery and more effective use of the capitol. This may include pursuing debtors and negotiating longer credit periods with suppliers. All of these sources are an excellent way to raise large amounts of cash.
External finance is generated from outside the business in a variety of ways. The main sources are loan capital, venture capital, ordinary social capital and personal financing.
Loan capital is one of the most common ways to finance a business. Loans are often used to buy fixed assets such as land and machinery. Usually, they are repaid in monthly installments and, generally, the bank will require a guarantee in case of default of a company. Although there are large amounts of funds available, loans are increasingly difficult to obtain and the application process can be long. In addition, too many loans increase the company's gears to dangerous levels. Commercial bank accounts often come with an overdraft mechanism that will allow the company to withdraw more money from the bank than it has in its account. It is a flexible method in the short term to ask for extra money. However, it is important to remember that interest is calculated on a daily basis and can be recalled in a very short time.
Venture capital is an extremely risky type of investment that a "venture capitalist" will make in a business that they believe has great growth potential. Venture capital provides long-term committed capital to help companies grow and succeed. The venture capitalist usually prefers to invest in business ventures. Getting venture capital is very different from getting a loan with a bank. Banks have the legal right to interest a loan and the repayment of capital, regardless of whether the business is a success, while venture capital is invested in exchange for a share in the capital of the business. As a shareholder, the performance of the venture capitalist depends on the profitability of the business. This performance is obtained when the venture capitalist "leaves" the sale of his participation when the business is sold to another owner.
Alternatively, a company may want to use ordinary shares to raise cash. To do so, they would raise new shares and offer them to new or existing shareholders. The market value of a company's shares is determined by the price that another investor is willing to pay for them. In the case of companies publicly listed, this is reflected in the market value of the common shares traded on the Exchange.
Lastly, small business owners can choose to invest their own money in their businesses. This money could come from; Personal savings, inherited funds, personal bank loans. They can make this decision because they desperately want their business to work and, also, because it is difficult for a business to obtain credit. The biggest risk is that if the company fails, the owner loses his investment or assets.
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