well this is one of the most important classes in the entire business management course because the main idea of this class is where to get money and how to use it right there are three parts in this class internal sources of Finance external sources of finance and short-term and long-term sources of finance and we have three assessment objectives that correspond to these three parts to analyze internal sources of Finance to analyze external sources of finance and to justify the appropriateness of short-term or long-term sources of Finance for a given situation the first two assessment objectives are ao2 which means that we are learning to explain internal and external sources of Finance in the last assessment objective is AO3 evaluation which means that we're learning to discuss justify suggest the most appropriate source of Finance in a game [Music] foreign if you guys watched my video classes before then you know that I'm trying not only to talk about stuff I'm also trying to encourage you to do something and take notes in a systematic manner so that you understand different stuff that relates to business better this class is no exception and I'm going to ask you to fill in this table I will be talking about three different types of internal sources of finance things that I'll discuss is what these sources of finance mean what are their advantages and disadvantages and in what kind of situations the given source of Finance works well or for what kind of situation the source of Finance is appropriate for so please make notes using this table and let's talk about personal funds first of all personal funds are just savings that you have or some money that your friends or family give to you maybe for free or maybe as a loan doesn't matter basically personal savings is the same as personal funds on the one and this source of Finance is free it means you don't have to pay a fee to acquire this source of finance and there is no interest rate you just use your own money you have full control over this money you are free to do whatever you want however on the other hand these personal savings are usually insufficient and in addition to that if your business idea does not turn out to be very successful then you will end up losing all your personal savings and if you have wife and kids and other responsibilities then it's quite risky so if you ask me in what kind of situations does this source of Finance work well I would say it works very well for unlimited liability businesses such as sole Traders and Partnerships if you forgot what limited unlimited liability is then you got the review 1.2 types of business entities the second internal source of Finance is called retained profits so if you run a business and your business is making some profits it means that the difference between revenues and costs is positive your business actually gets to retain to keep some profits then that would be retained profits that's not your personal funds it's something that your business generates but it's up to you as an entrepreneur or manager to decide how to spend these retained profits on the one hand retained profits is also a free source of Finance in a sense that you don't have to pay interest rate or pay a fee in order to obtain this source of Finance in addition you have full control over how you want to spend this money on the other hand if we're talking about new businesses then there are no retained profits there is nothing to retain so it would be completely inapplicable to startups in addition to that if you decide to retain profits and you're a company and you are doing that at an expense of not paying dividends to your shareholders then you might get the owners of the company shareholders really unhappy and lastly if your business is really small then retained profits might also be quite insufficient to fund sustain your operations thus based on these pros and cons of retained profits we might say that it is quite a suitable source of finance for companies that can retain sufficient amounts of money without making their shareholders unhappy if you are this kind of a business then retained profits might work well for you the last internal source of Finance is called sale of assets this is kind of self-explanatory it means that if your business has some assets for example machines or land or equipment or buildings then you can sell them in order to get some cash inflows on the one hand again same as with most so internal sources of Finance these sorts of Finance is free you don't have to pay any interest rate and you get to control the money that you raise through sale of assets completely you don't have to run it by the bank there are no agreements made you have full control over how to spend this money if you are a manager or entrepreneur however usually businesses sell some insignificant assets that do not jeopardize the operations and thus they are not able to raise too much money through that and in addition to that if you have ever tried to sell something online to another person you must know that it takes quite a long time to find the right buyer to negotiate the price to show their assets and etc etc so on the other hand sale of assets is a little bit time consuming but if your business is just about to relocate or shut down some of its parts and you actually have to sell assets anyway then it might be a great source of Finance this way if you are relocating or shutting down some of your divisions anyway you will have to sell Assets in anyway so why not raise some cash through it that's it there are only three internal sources of Finance which are personal funds retained profits and sale of assets I hope that you took notes in a systematic Manner and filled in this table in the next part of class we'll talk about external sources of Finance if you watch the first part of this class then you guys remember that I asked you to fill in a table while you were listening to what I'm saying in this class we're gonna do exactly the same thing but we are not talking about internal sources of Finance we are talking about external sources of Finance which are sources of finance that come from outside the organization we'll talk about eight external sources of Finance share Capital loan Capital overdrafts Trade Credit crowd funding leasing microfinance providers and business angels and in the end of this part of class I'm gonna share some additional external sources of finance that are not for some reason included in business management course of the IB so listen to what I'm saying fill in the table make sure you understand what the source of Finance means what are its pros and cons and what is the situation in which this source of Finance can work well let's go share Capital refers to money that is raised through sale of shares this can refer to companies either privately held companies or publicly held companies on the one hand if you sell shares you can raise quite large sums of money especially if we are talking about IPO and about publicly held companies in addition to that there is no fee or interest to pay you just sell shares and you get investment in return on the other hand since companies have limited liability these comes with a lot of bureaucracy because government wants to make sure that there is no fraud that everything is legal that investors are not at risk of losing their money so this is quite a bureaucratic procedure in addition to that you can potentially lose control if you sell too much shares if you sell too much ownership of your company to other people this is basically what happened to Steve Jobs because other people got more shares and they actually fired Steve Jobs from the company that he created and this is something that did not happen to Mark Zuckerberg because he retained most of the shares for himself so he is the majority shareholder and people cannot kick him out of his own company even though some of them would really like to do that I think and in addition to that even though there is no interest and fee you need to pay dividends every once in a while to your shareholders to make sure they want to hold on to their shares and not sell them thus decreasing the market capitalization of your company so in what kind of situation does share Capital work best it works best for limited liability organizations which are companies either privately held or publicly held especially if share Capital does not result in loss of control so if share capital is money that you raise through selling some of their ownership over your company to other people or organizations than loan capital is something that is not related to ownership at all you just go to the bank or another Financial lender and ask them for some money in exchange for fee and interest payments the clear advantage of this source of Finance is that there is no loss of control you need money you borrow money then you pay back it has nothing to do with shares with ownership and with control on the other hand nobody is gonna lend you money for free you will have to repay so there is interest payment that comes with all the loans interest rate is the percentage that is added on top of the loan that you are supposed to return to the lender in addition to that sometimes when you take a loan you should provide a collateral collateral usually is either property that belongs to your business or personally or a person or organization that can agree to pay back your loan in case you cannot so some banks some lenders are not willing to provide loans if there is no collateral if there is no guarantee that your payment will be taken care of in case you are not able to do that so having to find this collateral or having to give away some of your property if you are not able to repay the loan is clearly a disadvantage of this source of Finance so and what kind of situation it works best it works best when you need a quite a large sum of money that you can repay over a long term usually and when you do not want to lose any control and when you're quite sure that you can pay back there are a lot of kinds of loans so one thing that you might want to explore further is debentures and mortgages these are not included in business management course but if your interest leave a comment below and I can record a video class with some extra source sources of Finance also in the end of this class I will give you a full list of other external sources of finance that you might want to explore so please stay tuned the next source of Finance is called overdrafts overdrafts is an agreement with a bank when you can use money that you don't have let me give you an example so let's say you run a business your business of course has a bank account in this bank account when you reach zero usually it means that you cannot buy anything because you've reached zero your balance is zero you can't buy anything but if you have a good credit history or if the bank is just offering this service you can use overdraft you can go down to minus 10 000 US dollars or 20 000 US dollars or minus a few million dollars it depends on the agreement with the bank even though you reach 0 you can use more money that's the whole point of overdraft but everything is not that simple you have to repay this money quite soon and if you don't manage to refill top up your bank account then the interest rate is going to be much higher than for traditional loans so overdraft is basically a great source of Finance when you need some cash urgently that you can return in a very short time now let me summarize overdraft is taking more money than you have in your bank account on the one hand it's really easy to acquire you don't need a collateral you don't need any paperwork usually it's automatic you can just do it in the app on the other hand the interest rates are really high and you really don't want to have your payment overdue when it comes to overdrafts and it works best when you have minor cash flow problems for example let's say you produce chairs and usually you make 100 shares a month then some school approaches you and tells hey we need 1 000 chairs and you were like wow great this is a great order I will make a lot of money but you don't have enough money to buy wood however once you sign this deal with that school you know that they will pay you back so you can apply for an overdraft in your bank you can buy all the wood that you need even though you don't have money for it and then once you get payment from your customer once you provide 1000 shares you will be able to top up your bank account you will make a lot of money and you will pay back for overdraft so this is the kind of situation when overdraft works well Trade Credit the way Trade Credit works is buy now pay later Trade Credit is a relationship between creditor and debtor creditor is your supplier that gives you some raw materials or components and debtor is you the person who buys stuff from your supplier and Promises to pay back for the supply later within the credit period credit period is the time period within which you are supposed to pay back to your supplier to your creditor for instance if we continue the example with chair manufacturing you produce chairs and you have a supplier of wood so you can get some wood from your supplier today but pay back to your supplier in one month credit period is usually one or two months sometimes it's three months it all depends on the industry and that all depends on the relationship between creditor and debtor between the business and its suppliers the advantage of it is obvious you don't have to pay even though you can get your supply on the other hand if you are not willing to pay right now then you will end up paying more if you offer your supplier to pay at the time of purchase then probably your supplier will give you a discount but if you want to pay at a later date there is definitely not no discount you will pay full price or higher price trade credit works well when the relationship with your supplier with your creditor is really good when you can come to a solution that works best for you and your creditor crowdfunding is just think about it crowd funding this is when a crowd of people a lot of people make small donations and this way you raise money to kick-start your business so crowdfunding refers to obtaining small sums of money from many people usually with the help of crowdfunding platforms for example Indiegogo and Kickstarter I will leave the links to these websites below please feel free to click them and explore what crowdfunding is on the one hand crowdfunding is free you just register on the website and go both your stuff there in addition to that you get access to people who use crowdfunding websites all the time so it's a community of people who are happy to donate money to businesses that they like and that they want to support there is no issue of loss of control as in the case with share Capital you just obtain money you don't have to give ownership over your company to anyone these are just donations and in addition to that by raising money through crowdfunding platforms you can get direct feedback you can see how fast people are donating or not donating and thus you can see how feasible your business idea is if people are donating then it's working well if they're not then maybe you have to go back and change something about your business idea on the other hand there are three disadvantages first of all even though you don't have to pay for post and your crowdfunding campaign on crowdfunding platform they usually charge commission so whatever money you raise you will have to pay 5 10 15 or whatever percent to the crowdfunding platform for providing this space for you in addition to that crowdfunding platforms have a lot of rules that you will have to comply with so maybe your business idea is not something that you can actually post on crowdfunding platforms and finally as I mentioned earlier crowdfunding platforms are a community of businesses and donors so competition there is pretty high so you have to come up with an idea that stands out in order to get donors attention so crowdfunding works best if you have a brilliant idea and if you are a small business that needs access to finance the next source of Finance is leasing in leasing the relationship is between the Lesser and lessee so if you are a manager or entrepreneur who runs a business then you are the lessee you lease something from the Lesser for example if you run a pizza restaurant and you want to offer delivery to your customers but you don't have enough money to buy a delivery truck then you can lease this delivery truck from another company this way you will not have to buy it you will just pay monthly or yearly for the usage of this truck on the one hand there are no maintenance costs since you are not the owner of that delivery truck you don't have to take care of maintaining it of servicing your truck however if you break it and it's your fault of course you will have to pay for it in addition to that leasing is registered in the financial statements as an expense thus your tax will be lower because usually you pay tax for the profit that you make and the higher the expenses the lower the profits are this way the tax will also be lower because leasing is registered as an expense on the other hand for whatever you lease you will never get full ownership over it so if we're talking about the delivery truck then you will use it you will pay for it but it will never become your property so let's say the delivery truck is worth fifty thousand dollars and leasing is twenty five thousand dollars a year so if you use it for three years then you will clearly overpay for this delivery truck it's cheaper to buy the new one that would be a disadvantage thus the best situation when you want to lease an asset from another company is when you need some equipment in the short term this way you will not overpay in the long term and this way you will not have to take care of maintenance however if you want to lease something and have ownership rights once you make the last payment there is a source of Finance for that and it's not included in IB business management course it's called hire purchase higher purchase is one thing that you might want to export further microfinance providers are organizations that provide micro credit micro credit is really really small loans for example ten dollars fifty dollars really small sums of money that traditional banks will refuse to provide usually it works in less developed or developing economies on the one hand these source of Finance really helps to alleviate poverty in less developed economies all people need is just a few bucks to start their business but banks are not lending this money to them so microfinance providers take the role of the banks and help to kick-start many businesses in addition to that micro credit is usually quite easy to obtain because you do not need a collateral format on the other hand interest rates are usually quite high and you don't want to find yourself in a situation when your payment is overdue so microfinance works really well in less developed and developing economies when businesses just need very small sums of money to kick-start their business when it comes to microfinance Providers I have to talk about Muhammad yunus he is the founder of Grameen Bank in Bangladesh and he won a Nobel Prize for his idea and his back I'm going to leave a link in the description to this video with a TED Talk of Muhammad yunus please spend 20 minutes learning more about how microfinance providers work and about Grameen bank and about this wonderful person who created it and the last source of Finance is business angels business angels are people who are really really wealthy who are entrepreneurs and as well and who want to help some startups because they believe in their idea or they just want to help for some other reason but even though there are no interest payments business angels usually take some ownership of over the organization that they're helping out so on the one hand this source of Finance it's free there is no interest you just get a bunch of money from a really wealthy individual on the other hand this really wealthy individual will become the owner of your company to quite a large extent so this individual might end up telling you what to do and how to run your business so you might lose control potentially this is clearly a disadvantage these sorts of Finance works really well for businesses that have high growth potential and that appeal for some reason to certain business angels there are also some companies who are looking for companies with high growth potential and investing into them to maximize their investment these companies are called Venture capitalists so venture capital is another source of finance that is not included in IB business management course so please explore that if you are interested on my website I will keep all the links to all the additional sources of finance that I think you have to know but that are not included in IB business management course please check out my website or my Instagram where I will keep a note about these sources of Finance that's it about external sources of Finance I hope you filled in this table and now you know everything about eight external sources of finance that are included in business management course if you want to know more then I have another table for you but you will have to explore it on your own again you can use my website and you can follow the links there in order to explore these sources of Finance more if you would like me to talk about these eight sources of Finance please like this video subscribe to my channel and leave a comment and I would be happy absolutely happy to create another video class where I'll talk about these eight sources of Finance in the meantime here's a table for you to fill in good luck in the last part of this video class in part three we're going to talk about short-term and long-term sources of Finance but actually we're not going to talk about anything new we've already learned three internal sources of Finance in part one of this video class and we learned eight more external sources of Finance in part two of this video class in addition to that I suggested you guys to explore eight more external sources of Finance because I think that would be really helpful for your future career so in this part of class we are not learning any new sources of Finance we are just categorizing the ones that we already know into short-term and long term and are learning to recommend these sources of Finance in different situations so before we begin I would really like you to read this assessment objective justify the appropriateness of short-term or long-term sources of Finance for a given situation so this is what we're learning here now please stay focused on this assessment objective first of all let's try to learn to distinguish what is short-term what is long-term there is no agreement in literature about what short term was long-term so whatever I'm saying right now is kinda average and does not apply to every single situation it's a really nuanced question however usually I repeat usually short term refers to One Financial year or one fiscal year it's the same as regular year but it doesn't start on January 1st it can start whenever but it lasts for one year anyway so if you would like to purchase short term or current assets these are assets that last for less than a year then you will probably need short-term sources of Finance the common examples of short-term sources of Finance are short-term loans Trade Credit overdraft and retained profits all these four examples you can actually use these sources of finance and pay back for them within one year which means that they are short-term if you want to purchase some long-term assets that will last for more than one year for example some equipment or land or buildings then for these kind of assets you will need long-term sources of Finance another name for long-term assets is fixed assets or non-current assets that we'll talk about further in unit 3. so if you're approach is in long-term fixed non-current assets you will need long-term sources of Finance Long Term is usually usually more than one Financial fiscal year the common examples of long-term sources of Finance are share Capital loan capital leasing and re retain profits again retain profits it depends on the time scale it can be short-term and long term also there are some other sources of finance that we learned in part one and part two of this video class that I didn't put into any category because it's too nuanced you have to look at every situation particularly and see if it's within one year or if it's more than one year this way you yourself will be able to make a judgment whether it's short-term or long term okay so now you know the difference between short-term and long-term sources of Finance let's move on to the next stage the next stage is appropriateness this is actually what comes from our assessment objective what we're trying to learn here to justify the appropriateness of different sources of Finance so you know eight external sources of Finance three internal sources of Finance probably you explored eight more additional sources of finance and you can categorize them into short-term and long-term year yourself when you have enough data for it now it's time to learn how to make judgments about appropriateness of different sources of Finance the first thing you can do is again look at all these tables this one that one and maybe hopefully this one and works best at directly refers to appropriateness works best at is exactly what appropriateness is about in addition you can see pros and cons consider the pros and cons of different situations and recommend the most appropriate source of Finance but again keep in mind that short-term and long-termness is a relative thing indeed depends on legislation on agreements between the lenders and the organizations and many other factors so one size fits all approach will not work here you have to have a particular look at every individual situation another tip that I want to make is that one and the same source of Finance can be a short term for some businesses but long term for other businesses for example retained profits for smaller businesses such as sole Traders this is more likely to be short-term however if we talk about retained profits of multinational companies or publicly held companies or huge in multinational corporations then their retained profits would more likely to be long-term sources of finance and in addition to factors that we've already mentioned there are some other factors that need to be considered when you make a judgment whether the given source of Finance is appropriate or not these are these extra factors availability cost control time gearing and risk availability first thing you can do is just to see which sources of Finance are available to you to your type of business entity if you are a sole Trader then the share capital is definitely crossed off the list because you don't have any shareholders you are a sole Trader great Coast is another thing that you need to consider some sources of Finance are free but some of them need to be paid a fee or a commission or dividends or interest payments think whether the business will be able to repay for the source of Finance before applying to before trying to obtain the given source of Finance control as you remember some sources of Finance such as business angels and share Capital might end up in loss of control however other sources of Finance have nothing to do with control such as band clone so when you are making a judgment about the appropriateness of a particular sof to a particular business then think whether retain and control is important or not the next factor is time if you are purchasing a short-term asset a current asset then you probably need short-term source of Finance because you'll be able to repay within one year if it's something that is needed for long term which is more than one fiscal year then you will need a long-term source of Finance so time is also of the essence and lastly gearing and risk is one more Factor gearing refers to the ratio between share capital and loading Capital organizations can be high geared and low geared High geared organizations rely on loan Capital more than 50 percent so it means that most of finance that they have more than 50 percent is a loan so this is considered to be quite risky and financial lenders would be more reluctant to provide funds to organizations that are highly geared because they already have a lot of loans and the chances that they will pay back are thus lower low geared companies are the ones that rely on shared capital on internal sources of Finance more than on loan Capital Financial lenders would be more willing to provide loans to low-geared companies but low geared companies tend to grow slower less risk but slower growth so these are five more additional factors that you should consider when making judgments about appropriateness of different sources of Finance we've learned 11 sources of Finance three internal eight external plus I encourage you to learn 8 more on your own you can categorize them into short-term and long-term in any given situation using one year Rule and then you can make a judgment about its appropriateness use and Pros cons when it works best column and other factors that I've just talked about I know that's a lot of things to keep in mind but once you start practicing it this should become easier because practice makes perfect as my favorite school teacher set now I will just say two more things I'll just say two part of video class first Common Sense is really important you know all the factors you have done a great research about sources of Finance but you should develop logic and common sense in order to make the most accurate judgment also don't forget about gut feeling your intuition sometimes it also helps a lot and the second thing that I want to emphasize is that source of Finance is not the same as Revenue stream we'll learn revenue streams later in unit 3. for now this is the source of Revenue this is different ways to get customers to pay for your product source of Finance has nothing to do with customers these are different ways to acquire money from different kinds of lenders source of finance and revenue streams are not the same these are two different things foreign this is the end of 3.2 sources of Finance please remember that this is one of the most important classes in the entire business management course if something is unclear make sure you talk to your teacher you talk to your classmates or you ask me a question in the comments below and make sure you get all your answers because this is one of the foundations of business management in addition to that please have a look at the assessment objectives and make sure you achieved all of them oh my God I almost forgot to ask you to like this video subscribe write comments and tell your friends about it crew thank you bye bye [Music]