•Introduction to business finance
•Explain what is meant by Internal and External
sources of finance with examples
•Why should firms aim for a balanced portfolio of
Agenda
finance sources- i.e. used a variety of funding
sources? State their benefits and limitations.
•Discuss the finance sources and their suitability for
large projects- i.e. building a new hotel, IT upgrades,
or renovations.
•Conclusion
Introduction to Business Finance
•Role of finance in business operations
•Types of business finance: Internal and External
•Balanced portfolio of finance sources
• Finance sources for large projects
Internal Sources of Finance
Retained earnings
Sale of assets
Owner's investment
External Sources of Finance
Equity financing
Debt financing
(issuing shares,
(loans, bonds)
venture capital)
Grants and
subsidies
Benefits
Risk Diversification: Minimizes the risk associated with any single
Balanced source of finance.
Portfolio of Cost Efficiency: Different finance sources come at different costs,
providing opportunities for cost savings.
Finance
Limitations
Sources:
Benefits and Varied Terms and Conditions: Different finance sources come with
their own set of terms, potentially leading to conflicting obligations.
Limitations Potential for Over-Leveraging: More sources of finance could
increase the risk of over-leveraging.
Increased Costs: Some sources may be more expensive, increasing
the overall cost of capital.
Finance Sources for Large Projects
Venture Capital: Suitable for high- Stock Issuance: Useful for large, Bank Loans: Traditional form of
growth, high-risk projects like IT publicly traded companies. It can financing, suitable for all types of
upgrades where the potential for raise substantial funds but may projects, provided the firm has a
return is high. dilute existing shareholders' value. good credit rating and collateral.
Bonds: A useful method for large
Leasing: Suitable for acquiring high-
companies to raise significant funds.
cost equipment or technology for IT
Bonds can be issued to finance large
upgrades or renovations.
projects like building a new hotel.
Suitability of Finance
Sources for Large Projects
Building a New Hotel
•Typically requires a significant amount of capital. Long-term debt financing like bank loans or
bonds can be suitable. Equity financing through stock issuance can also be an option.
IT Upgrades
•Venture capital can be a good choice due to the high-growth, high-risk nature of IT projects.
Leasing is also a good option if it involves acquiring high-cost IT equipment.
Renovations
•Depending on the scale, these can be financed through smaller bank loans, leasing (for equipment
or furniture), or even from personal savings. For larger renovations, issuing bonds or obtaining
larger bank loans may be suitable.
Sources of funds, their benefits, and
limitation
Equity Financing
Benefits
1. No Repayment Obligation: Unlike debt financing, equity doesn't have to be repaid,
reducing financial risk.
2. No Interest Payments: Equity financing doesn't require regular interest payments,
improving cash flow.
Limitations
3. Dilution of Ownership: More equity financing means more shareholders, which
can dilute the ownership of existing shareholders.
• Loss of Control: With more shareholders comes the potential for disagreements and
loss of control over business decisions.
Sources of funds, their benefits, and
limitation
Debt Financing
Benefits
1. Ownership Retention: Debt doesn't dilute ownership, allowing owners to retain control of
the business.
2. Tax Advantages: Interest payments on debt are usually tax-deductible, reducing the net cost
of borrowing.
Limitations
3. Repayment Obligation: Debt must be repaid regardless of business performance, potentially
straining finances.
4. Interest Payments: Regular interest payments can affect cash flow, especially if the interest
rate is high.
Conclusion
•Recap of main points
•Importance of selecting appropriate finance sources for
businesses
• Final thoughts on achieving a balanced portfolio of finance
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