alekovic
Member
- Joined
- Sep 18, 2011
- Messages
- 45
- Gender
- Undisclosed
- HSC
- 2014
Hi,
I was confronted with a source of funds to business purpose question in my finance stimulus task on Tuesday.
The question asked for a justified recommendation of one EXTERNAL source of funds to satisfy the procurement of a $2,500 printer (or some other piece of capital equipment, not entirely sure).
I recommended (after prefacing my remarks with "if it is currently economically feasible for her to do so") an injection of the owner's own capital into the business. I then justified the choice, indicating that the size of the purchase was quite modest (she should be able to pay for it) and an injection of owners equity does not carry any contractual interest obligations associated with other forms of external financing. I then said this will allow the owner to realise the investment gains of her new piece of capital sooner.
HOWEVER, after speaking with my new business teacher after the exam, he seemed hesitant to agree that this constituted an "external source"- and suggested that it would have been more appropriate to choose something like factoring or over-draft. I told him that I had thought of that during the paper, but decided against it as I thought a business should only ever sell its account's receivable at a reduced rate if it is really strapped for cash and needs money right away (the purchase of equipment doesn't really seem that urgent in my mind)
So I guess my question is: does an injection of owner's equity qualify as an external source of funds? One of my text books says it does, while the other places it in internal sources of finance... I was under the impression that internal sources of finance simply referred to retained profits (as specified by the syllabus).
"In the theory of capital structure, internal financing is the name for a firm using its profits as a source of capital for new investment"
I don't want to start a huge mark war with a new teacher, but I am pretty certain my answer is correct.
Could someone please offer their thoughts? thanks
I was confronted with a source of funds to business purpose question in my finance stimulus task on Tuesday.
The question asked for a justified recommendation of one EXTERNAL source of funds to satisfy the procurement of a $2,500 printer (or some other piece of capital equipment, not entirely sure).
I recommended (after prefacing my remarks with "if it is currently economically feasible for her to do so") an injection of the owner's own capital into the business. I then justified the choice, indicating that the size of the purchase was quite modest (she should be able to pay for it) and an injection of owners equity does not carry any contractual interest obligations associated with other forms of external financing. I then said this will allow the owner to realise the investment gains of her new piece of capital sooner.
HOWEVER, after speaking with my new business teacher after the exam, he seemed hesitant to agree that this constituted an "external source"- and suggested that it would have been more appropriate to choose something like factoring or over-draft. I told him that I had thought of that during the paper, but decided against it as I thought a business should only ever sell its account's receivable at a reduced rate if it is really strapped for cash and needs money right away (the purchase of equipment doesn't really seem that urgent in my mind)
So I guess my question is: does an injection of owner's equity qualify as an external source of funds? One of my text books says it does, while the other places it in internal sources of finance... I was under the impression that internal sources of finance simply referred to retained profits (as specified by the syllabus).
"In the theory of capital structure, internal financing is the name for a firm using its profits as a source of capital for new investment"
I don't want to start a huge mark war with a new teacher, but I am pretty certain my answer is correct.
Could someone please offer their thoughts? thanks
