PAPER 1

KEY WORDS UNIT 1

SOURCES OF FINANCES

Capital Expenditure: Are funds that a company have to acquire, upgrade and
also maintain physical assets as property’s or equipment. Is normally used to
undertake new projects or investments by the firms.

The advantages are that it increases the earning capacity of a concern, helps
the company to stood in a market, also it will make the company self
sufficient which means that the company would not lead to depend or relay in
others and will also help if the firms need a loan or a facility from a bank
because of the mortgage assets of the CAPEX.

The disadvantages In the on other hand it need a very clear planning and
budget since If no it may go vain, it may result in heavy interest charges, if the
plan of CAPEX is fail it may result in sale of assets on lower prices resulting
in heavy looses.

Example: In the foundation of apple the ownership decided to buy several

products to even compete with greater companies at that time they spend great
capital expenditure to do this even at the point that they almost couldn’t
continue.

Revenue Expenditures: Is the money spent by the company or by the frim on

general operating cost such as rental and maintenance. The company recurs on
their natural income on the side of the credit and profit.

The Advantages: It maintains the same level of output of the company, its
maintain finances equilibrates, save the company from having problem with
machinery or employs wages, saves from loans to banks.

The Disadvantages: The cost are may reach very high amounts depending on
the size of the company, its always necessary for a company finances since
without it the company fails, may bring legal problems if irregularities, the
company efficiency depends on this.
Example: The cost of maintenance from the machinery, workers, security,
food of a thematic park each month.

Personal Funds: A personal fund is linked to a specific goal, which consists

in private donations and legacies that they are used for the intended purpose,
without administration cost.

The Advantages: Total control of the firm finances, movements and

decisions, ownership, no debts to banks, no need to share profit or capital, no
loans from banks or investors.

The Disadvantages: In case of the company failing the sole traders or

individual will be in bankrupt, no external economic helps, no more capital
beside the personal funds, the budget may be to low to create a business.

Example: Ferruccio Elio Arturo Lamborghini was the creator of the sport cars
company Lamborghini which was funded whit his personal funds acquire with
the sell of tractors until the creation of the brand for sport cars

Retained Profit: Is the profit kept in the company rather that giving out to the
shareholder’s as the dividend. Also is the widely and most important long-
term source of finances for a business.

The advantages are that it helps to the growth of the business since the capital
left is used for expanding, Increase the return on Investment and shareholder
equity, this retained profit are used to retain profits which in the future will
give greater earning to the firms.

The disadvantages are the higher taxes since having retained profit make the
company pay to federal and state higher taxes, also it may cause that investors
decide that a cheaply priced stock is a sign that a company is in trouble
because if the company’s policy is to maximize retained profit, it can be
disturb by the dividends an during that time in causes economic troubles since
some investors may require high dividend to offset the risk.

Example: The funds used from Chevrolet to invest in to new technology for
their new cars and for future car models
Sale of Assets: Is the distribution of the valuable property that may be
tangible or intangible, also it may understand as the relieve companies will
have in there operations of value items for cash or other type of compensation.

The advantages are that the companies make profit since the sell of asset as
homes, jewellery or collectibles that are sold make profit which investors use
them to finance other investment ventures, also it reduces the debt since
reducing the number of asset such us vehicles or houses are sell to reduce their
credit card debt, and in business owners to reduce the amount they owe to
creditors, also it may safe a business of a bankrupt.

The disadvantages are there could be tax consequences since the sell of asset,
there is a capital gain taxation which increases 0 to 20%, also at the moment
of selling the item in may no sell for its total market value or even for the
value it was purchase which will mean a loss since the investment wasn’t
recover at all.

Example: The Volkswagen group. Each of there firms that compose even if
they have the same ownership each of them haver their own branch, models
and assets.

Share capital: Are all the funds raised by a firm in exchange for share for
either common of prefers share stocks, its mainly the amount of share capital a
company reports o there balance sheet for the total amount initially paid to the
shareholders.

The advantages are that share holders have the right to vote, the ability to
elect the board of directors and are able to buy as many new stocks as
possible.

The disadvantages are that share prices may fluctuated a lot, the company
may go broke because of occasional dishonest auditor’s and this share require
great hard work analysis which may result in fail.

Example: Verizon whit T mobile has share capitals with apple with the apple
since apple promotes their services with the sell or launch of new products.

Loan Capital: Is the part of a company’s capital employed that is not equity
capital and that it earns a fixed rate of interest instead of dividends, and most
important it must be repaid within a specific period of time, no matter the
financial position of the business and it may be obtained from a bank of a
finance company.

The advantages is that it allows the company to maintain there ownership of

their property, also there is no necessity for the company to sell assets or leave
property’s in order to gain capital, the lender will not have control over the
business and in addition the loan capital repaid will benefit in terms of gaining
profit.

The disadvantages are the repayment of the loan is separate, it may be a great
debt, the rate interest are very high, and if it not pays the company could a
final be part of the payment and be acquire by the bank or the institution that
make the loan capital.

Example: When Pagani motors didn’t broke 15 years ago because they
acquired a loan capital from one of there most loyal clients which was given
from the sell of 6 Pagani cars to that client, and then he became part of the
company with share percentage of the profit of the sells.

Overdraft’s: Is an extension of a credit from a leading institution when the

account reaches zero, also it allows the firm to continue withdrawing money
from the account even if there is no money or funds left.

The advantages are that it handles timings mismatch of flow funds, since it
helps a firm where its cash flow is moving in and out during different periods
of time during a month, it helps keeping good track record, timely payments
and less paperwork since its facility’s to avail compared to long term loans
which would require more paper works, also in flexibility since the amount for
the loan can be whatever amount and the interest cost is different a more
flexible that normal loans with fixed cost .

The disadvantages are that they have high interest rates, there is a great risk
of reduction limit since its facility during a period a temporary loan and t
undergoes on the bank eyes but it may be a risk of a decrease in the limit of
the withdraws limit, there is also risk of seizing since the company may risk
those assets by being seized if it fail to meet the payment and also the debtor’s
collection becomes lethargic.
Example: Apple had a moment when in didn’t make enough profit, which
meant not enough capital, but the continue investing in new project as Siri
where Banks and other investors help them even if they accounts reaches zero.

Trade Credit: Is an agreement in which the costumer can buy goods on

accounts, paying the supplier at a later time and its essential to trade credit
companies.

The advantages are that it comes with more sales since the costumer may buy
the goods and pay later so the would have more time to pay and more
flexibility, also in no cash so for the pint of view from the resellers buyer’s
may ramp the volume of the purchases when the demand is higher and the
trade account will make it more flexible.

The disadvantages is the bad debt created from the trade credit since if the
buyers don’t pay off their debt and the time there is a negative direct effect to
the supplier of the good or service, also the high costs since if buyers aren’t
careful in the management f the trade credit, they will end up paying very high
cost for the inventory.

Example: When the iPhone X came to pre- sell they consumer’s had the
option to acquire the product earlier by paying 50 dollars as initial pay and
each month paid the same cost until achieving the total cost of the phone.

Grants: Is the subsidy, bounty given by the government or other type of

organization for a specific purpose to an eligible recipient.

The advantages are that they provide a huge monetary help and reward, the
firms with this grants they find easier to raise moneys from other governments
and private sources, also in makes the firms cost reduce since this may pay a
part of them to make the frim more efficient.

The disadvantages are that this government grants are reimbursements

system that affects cash strapped organizations, this requires a lot of hard
work and tons of research planning, also this grants come with a set of rules
that are eligible to apply that can be so specific that they may exclude many
organizations.

Example: The federal grants given by the US to s recipient to carry out

specific purpose.
Subsidy: Is a benefit given to an business or organization usually from the
government and comes in form of cash payments or tax reductions and are
giving normally to reduce some type of burden there may be direct or indirect
subsidy’s.

The advantages are that they reduce the cost of produces which makes the
suppliers supplied more of the product by producing more, it reduces the
prices and increase the demand for the good.

The disadvantages are that the subsidy may be funded from the increase in
taxes; the opportunity cost increases, the subsidy takes money and investments
from other areas of the government.

Example: Subsidy’s given the US government to the agricultural area which

per year are in total $22 billion dollars which help the farms to make higher
profits ad reduce cost of production.

Debt Factoring: Is the financial arrangement in which a company takes

responsibility for collecting money related to a business invoice and also
immediately it pays the part of the business on the amount owed on the
invoice. Also it may be understand as a financial arrangement by which a
business sell its invoice to a third party discount.

The advantages are is the quick infusion of cash, the improve in cash flow,
shortens the cash cycle, gives protection against bad debts, has lower overhead
costs.

The disadvantages are that the interest rates are higher than the bank
financing, have risk of harming customer relations, potential bad debt liability,
is not goof for costumers with poor credit rating and is a slow paying customer
base translate to higher factoring fees.

Example: Volkswagen acquiring the branch of Audi and Bugatti and the
giving it to a third party that controls its in some way but not being the
ownership.

Leasing: Is the financial arrangement by which a frim or company, pays to

use land, vehicle between other things during a particular period of time-
The advantages: Quality assets since the ownership of the assets lies with
the lessor while the lessee just pay the rental expenses, Balanced cash Outflow
since leasing cash outflow relayed to leasing a spread out for several years,
helping the business have a cash flow profile, also it brings tax benefits, no
risk of obsolescence, terminations right and low capital expenditure.

The disadvantages: Lease expense, since lease payments are treated as an

expense and not as a equity payment in terms of a assets, it reduces limited
financial benefits because from the pay of lease towards land the business will
not and can’t benefit from the value of the land, also it bring to the business
reduce in return for equity holders, creates a great debt, limit access for other
loans, the business maintenance of the asset even if they don’t own it.

Example: The government of Mexico rent the police cars to the Dodge
Company and they must maintain the cars and be aware of the maintenance of
the cars.

Venture Capital: Is a financing that the investor provides to a start a

business; this capital comes from well off investors, investor’s banks and other
financial institution.

The Advantages: It gives additional resources in critical areas as legal, taxes,

personal matters; it provides resources for faster growth and a greater success,
also make connections easier since venture capital are typically well
connected in the business community and these connection may have great
benefits.

The Disadvantages: The can loss control in terms that the drawbacks
associate’s with equity financing generally may be compounded with the
venture capital financing, so this could determine the company’s directions,
also minority ownership status will be depending on the size of the VC
company in the firm which may be more that the 50% making the owners
loose the ownership of the management of the business.

Example: Starbucks owner was 200 times rejected fro investments, but the
and individual invest in his idea and became part of the business in which he
share profits.
Business Angels: Is an individual which provides capital for the development
of a business, they typically aim to help entrepreneurial individuals and firms
success with there ideas by investing there own money.

The Advantages: The Bas are free to invest decision more often a quicker,
there no need for collateral or personal asset. There is access to the investor’s
knowledge and contacts; there is a better discipline because of the outside
scrutiny and no repayments or interests.

The Disadvantage’s: They are not suitable for very great investments, is very
difficult to find a angles investor, the business must share profit to the angles
investor and there Is less structural support available from the angle investor
that from a invest company.

Example: Gil Pencina is the individual which have invested in every single of
the most important technology companies now a day’s.

REFERENCES-

https://www.thehartford.com/business-playbook/in-depth/venture-capital

https://www.nibusinessinfo.co.uk/content/advantages-and-disadvantages-
business-angel-funding

https://www.bayt.com/en/specialties/q/324682/what-are-the-benefits-amp-
drawbacks-of-capex/

https://www.sapling.com/8615419/advantages-disadvantages-sale-assets

https://www.lawteacher.net/free-law-essays/commercial-law/advantages-and-
disadvantages-of-raising-loan-capital-commercial-law-essay.php

http://smallbusiness.chron.com/advantages-disadvantages-trade-credit-
22938.html

http://www.polarisgrantscentral.net/instruction.htm

http://blog.factorfunding.com/blog/advantages-and-disadvantages-of-debt-
factoring/