Sources of Finance and Related Constraints

This assignment requires students to analyze the various sources of finance available to micro entrepreneurs, including crowdfunding, peer-to-peer lending, and online marketplaces. The student is expected to discuss the advantages and disadvantages of each source, as well as the related constraints and challenges faced by entrepreneurs in accessing these resources. The assignment also involves a critical review of relevant literature on entrepreneurial finance and its relationship with growth.

Running head: INTERNATIONAL FINANCIAL REPORTING STANDARDS
International Financial Reporting Standards
University Name
Student Name
Authors’ Note

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Table of Contents
Explanation of various resources utilized to finance operations and purchase of assets...........2
Appraisal of effect of different classes of securities on content of financial reports.................8
Reference..................................................................................................................................13

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Solution to the following:
Explanation of various resources utilized to finance operations and purchase of assets
The most important component initiating a business is financing. As such, even the most
basic form of business incurs start up costs. Therefore, financial resources can be acquired
from various sources. Financial resources required for financing operations as well as
purchase of assets include personal accounts of the founder of the company. On the other
hand, loans along with lines of credit might perhaps be granted from various financial
institutions, friends and family, private financiers as well as governing bodies. Furthermore,
there are several grants that can be offered from various private as well as public sources to
specific entrepreneurs of diverse demographics as well as personal state of affairs. As rightly
indicated by Hopper & Bui (2016), financial resources refer to different financial funds of the
business enterprise. From the economic standpoint, financial resources can be considered to
be fraction of the asset of the business enterprise (property). Every so often, financial
resources can be considered to be just financing, for example, business finance, personal
finance as well as public finance. Managers operating in the finance department need to be
sentient of the manner they plan to fund and fitting sources of finances that is appropriate
sources of funds (Vernimmen et al., 2014). It is important to take into account various
available source along with the possible long term impacts to the corporation at the time of
dealing with long term funds.
Essentially, there are different factors that affect sources of finances. Fundamentally, the
sources of finances selected depend on certain factors namely purpose (that indicates towards
the purpose for which the fund will be used for), time period (period for which the finances
can be required), amount (the amount of money that is required by the businesses) together
with ownership and size.

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In terms of time period, financial resources can be classified as short terms and long
term funds.
Short term funds
Levi & Segal (2015) suggests that short term finance is usually utilized to fund daily
operations. Different examples of short term funds take in short term loans, trade credit,
facilities of overdraft as well as lease finance.
Overdraft: Overdraft is undoubtedly extremely suitable since this can be paid off at any
specific time period. Nonetheless, facilities of overdraft can essentially be reserved at specific
period from a particular entity of business otherwise person
Trade Credit: This source can be considered to be useful to various new units of businesses
since disbursement of particularly current liabilities can necessarily be deferred (Levi &
Segal, 2015)
Lease Finance: Unusually this can be considered to be cheaper than locating funds to
purchase assets.
Short term finances are profoundly used by different businesses having peaks in certain
season else wise small sized trade looking forward to disburse remuneration to members of
the staff of the corporation, ordering of inventory and many others.
Long Term Finance
Prohorovs & Beizitere (2015) suggests that trades often have need of funds (particularly, long
term in nature). This is necessarily more expensive and at the same time less flexible. This
helps in financing major investment projects. As correctly indicated by Chang et al., (2016),

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varied sources of fund (particularly, long term) obtainable take in debt funds, equity funds,
venture capital as well as leasing.
In case of debt backed funding system, business might look for to raising funds from various
financial mediators namely bank. As such, Debt funding unconnected to equity based funding
can be said to be cheaper as interests on disbursements acquires tax relief (Donohoe, 2015).
This refers to the fact profit acquired after tax (PAT) is over and above a specific amount
than it necessarily would if organization acquired equity funds. Donohoe (2015) says that
organizations might probably decide to acquire funds through issuance of debt as firm’s
shareholders are not always keen to put in higher fund or capital amount. Again, there are two
bonds categories namely redeemable ones otherwise irredeemable ones. Different categories
of particularly bonds take in floating rates of debentures, various convertible bonds as well as
zero coupon bonds.
In case of equity finance, a specific business might perhaps decide to acquire finances by
means of issuance of shares for raising capital. Essentially, equity shareholders own various
ordinary shares and can possess rights and power of voting. As such, the rights possessed by
them show that shareholders exert certain control within the company (Fraser et al., 2015).
Even though equity finances is relatively pricey because of greater amount of risk to
financiers, to deliver a larger funds pool for various big companies that might perhaps
participate in trade activities globally. Three different classes of share capital include
shareholders (that is to say the ordinary ones), shareholders with cumulative preference as
well as non-cumulative preference shares.
Ordinary shareholders necessarily possess voting rights. However, they are at the base of the
listing of creditors during liquidation. As such, ordinary shareholders acquire gain from any
excess funds prepared by the corporation.

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Shareholders particularly the ones with Cumulative preference ones possess diminutive rights
and power of voting. In essence, they acquire a set sum for every company share (Levi &
Segal, 2015). In case if a business concern fails to make payments for dividends, then the
holder gets entitled to different missed payments at the time when the subsequent
dividend/bonus is pronounced.
Non-cumulative preference shares- In case if a business enterprise fails to make
disbursements for dividend, the holder is not entitled to missed payments when the following
dividend is pronounced.
As rightly put forward by Scott (2015), sources of finances of a business concern can
necessarily be classified as internal as well as external sources. Internal sources refer the ones
that are raised from within the corporation and external sources refer to the ones that are
raised from outside the corporation (Williams, 2014). There are essentially five different
internal sources of acquiring finance that include investment of owners, various retained
profits, stock sale, sale of various fixed assets as well as debt collection.
Internal resource utilized to finance operations and purchase of assets
As correctly put forward by (), internal resources of a firm can be considered as funds that
originates from savings of business owners. Nevertheless, it might perhaps be in the structure
of start up business and capital that can be used once the business is building up. In addition
to this, it might possibly be in the shape of additional capital used for the purpose of
development (Williams, 2014). () asserts that this is essentially a finance source in the long
term period. Benefits of investment from different owners are that there exists no requirement
for repayment and interest is not to be paid. Weakness also contains diverse limitations to
specific amount that a possessor can put in. Again, internal supply of finance also includes
reserved proceeds. Intrinsically, this is a specific foundation of finance that is only obtainable

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for business concerns that has been carrying out business for more than a year. Particularly, it
is the point in time when profits earned can get returned into the trade again (Williams,
2014). This is necessarily an intermediate else wise finance source during the long term.
Benefits of attainment of retained profits is that it does not need to be repaid and no amount
of interest is payable. Disadvantages of retained profit are that it is not available to newly
established businesses. Also, businesses might not make adequate profit to plough back to
business.
Internal sources also include stock sale. This refers to money that can be acquired from
selling different stock of a business that has remained unsold. Essentially, this is necessarily a
thing that takes place at a time when profits earned by a business can again be ploughed back
to specific business. Sale of stock can be indicated as short term resource of funds
(Vernimmen et al., 2014). Particularly, this is a fast way of raising funds and by means of
selling stock it decreases costs related to holding the same.
Again, internal sources include sale of fixed assets. In particular, this is a monetary resource
that comes from marketing fixed assets, namely, a particular part of a set of equipment that is
no more required. Also, business entities also do not possess excess fixed reserves that can be
sold out. Again, there is also a constraint or constriction to fixed assets a company can put up
for sale. Essentially, this is also source of funding for medium term. Van der Stede (2015)
considers to be an appropriate way to raise funds from asset that is no more required. Again,
there are also some businesses that are not likely to have additional assets to sell. This is also
considered to be a slow mechanism for raising funds.
Debt collection can be considered to be an important internal source. A debtor is a big shot in
debt. A specific business can raise funds by acquiring money owed to the ones from

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particularly the debtors. Again, not all business operations have debtors who necessarily
handle cash. Essentially, this is a short term funding source.
External Sources utilized to finance operations and purchase of assets
As correctly put forward by Scott (2015), bank loan can be considered to be an external
source. Essentially, this is money borrowed at an agreed interest rate over a specified time
period. This is essentially a source of medium term period. Again, bank overdraft is where
businesses are permitted to be overdrawn on the account. This implies that they can still write
down cheques even though they do not have adequate money in account. In particular, this is
a short term source of funds. Also, additional partner is also an external source of finance and
this is a source of funds appropriate for partnership business. Essentially, the new partners
can necessarily contribute towards additional capital. As indicated by Robinson et al., (2015),
share issue can be regarded as a specific source of finance that is apposite for Limited
Corporation, involves issuing more amount of shares and is a long term source of fund.
Additionally, leasing is like renting a specific asset and this involves presenting set
compensation. Essentially, this is a medium term source of funding. Another source of
finance includes hire purchase that refers to a method that permits a business to acquire lump
sum amount (Prohorovs & Beizitere, 2015). This entails payment of an initial deposit as well
as regular disbursement for a specified time period. Mortgage is another external source of
finance that indicates towards loan secured on specific property, repaid in instalments over a
time period normally over 25 years.

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