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or internal financing, where the firms finances its growth through cash flows from operations, rather than distributing the cash to the other owners in the form of dividends.
such as accounts payable , which increases automaticlly with increases in sales.
example: as a firm's sales grow it purchases more inventories and suppliers extend the firm more credit, which increases accounts payable.
which comes from outside lenders and investors.
examples: stockholders, partners, or sole proprietors.
four basic factors that determine how a firm is financed
- 1) Firm's economic potential
- 2) the size and maturity of the company
- 3) the nature of its assets
- 4) the personal preferences of the owners with respect to the tradeoffs between debt and equity
return on assets
rate of return on a firm's total assets invested, computed as operating income divided by total asset.
differences between debt and equity
- high equity, owners must share control with other equity investors who buy the stock or make a large investment
- lower financial risk
- lower potential return on investment for the owner
- High debt owners maintain control without having to make a large investment.
- higher financial risk
- higher potential return on investment for the owners
different sources of financing
- 1) personal savings, family and friends, credit cards
- 2) business suppliers, and asset based lenders
- 3)private equity investors
- 4) banks
- 5) Government
- 6) large companies and stock sales
types of loans
- lines of credit
- term loans
lines of credit
an informal agreement between a borrower and a bank as to the maximum amount of funds the bank will provide at any one time.
Money loaned for a 5 to 10 year term, corresponding to the length of time the investment will bring in profit.
represent long-term source of debt capital.
a loan for which items of inventory or other movable property serve as collateral.
real estate mortgage
a long-term loan with real property held as collateral.