Sources of Finance

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Sources of finance

What are the main sources and finance for UK firms and why?

All firms need some kind of financing. Access to finance may differ considerably from firm to firm depending on what type of business they are and how big/known they are; Sole Trader, Public Limited or Private Limited Company.

There are both INTERNAL and EXTERNAL sources of finance. Finance can be short, medium or long term.

Internal sources of Finance: 2 main types 1) Funds from the owner(s) and the family. These funds are normally savings and other money invested as capital. ✓ Funds from the family can take the form of a loan provided at a low or nil rate of interest. This form of financing is quite cheap. ✓ Also it can be very
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➢ Involves the putting down of security

Limited Company Ordinary shares: are shares issued to the shareholders of a limited company. In return Shareholders receive regular dividend payments out of the profits of the company.
Advantages:
✓ Dividends on ordinary shares very according to the level or profits. If there are no profits, dividends don’t have to be paid. The cost of finance is therefore variable and will not be such a burden if profits are low.
Disadvantages:
➢ If outside investors buy into the company, they will have an element of control which could prove disruptive for exiting management ➢ With most shares, finance is never paid off because there will always be a need to pay dividends. ➢ If the company foes ‘bust’; ordinary shareholders are the last people to get paid (disadvantage for shareholders)

Limited company preference shares: are shares issued to the investors of a limited company. They receive dividends in preference to ordinary shareholders and often have a fixed percentage dividend.
Advantages:
✓ Preference dividends are fixed; makes budgeting easier ✓ Shareholders unable to take part in the running of the business
Disadvantages:
➢ preference dividends fixed so even if profits are low, they have to be paid

Debenture stock:

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