Sources of Finance for Established Firms

Sources of Finance for Established Firms

Retained Profits

  • Retained profits refer to the part of net profits which are kept back in the business as reserves, rather than being distributed among shareholders.
  • This is a cost-effective way to finance business activities but could lead to shareholder dissatisfaction if dividends are not paid out.

Revenue from Sales

  • Proceeds generated from the sale of goods and services, known as revenue from sales, is a direct source of finance.
  • While it ensures a regular cash flow, the reliance on sales revenue could be risky during periods of low demand.

Bank Loans

  • Established firms can obtain bank loans by presenting a robust business plan and demonstrating repayment capacity.
  • Although loans provide large amounts of funds, they usually come with interests and must be repaid over a fixed period, including in times of financial difficulties.

Leasing

  • Rather than purchasing assets outright, businesses might opt for leasing, where they regularly pay the owner to use the assets.
  • Leasing keeps cash in the business and often includes maintenance, but can be more expensive in the long run.

Hire Purchase

  • Hire Purchase allows firms to use an asset while paying for it in instalments. Ownership transfers once the last payment is made.
  • It spreads the cost over time but ends up costing more than buying outright due to interest charges.

Issuing Shares

  • Larger firms might issue shares to raise finance. This involves selling a portion of ownership in the firm in return for cash.
  • While issuing shares brings in substantial investments and doesn’t require repayment, it does dilute the owners’ stake in the business and may result in a loss of control.

Commercial Mortgages

  • Commercial mortgages are used to buy business premises or as a way to release equity from existing ones.
  • They offer large loan amounts, but the property is at risk if repayments are not met.

These options present various ways in which established firms can finance their activities. It’s important for businesses to carefully consider each source’s advantages, disadvantages, and implications on the company’s future.