10) UNIT 2 - Sources of Finance Flashcards
List the 2 general types of sources of finance
- internal
* external
List the 3 types of internal sources of finance
- retained profits
- sale of assets
- increasing owner capital
Describe and give 1 advantage and 2 disadvantages of:
retained profits
Profits kept back from previous years and used to generate more profit in the future
ADV:
•no interest to pay back
DISAD:
•growth may be slow if retained profits is main source of finance
•shareholders may be unhappy as they receive a smaller dividend
describe with a named example and give 2 advantages and 2 disadvantages of:
sales of assets
Selling off assets to fund future development e.g selling premises
ADV:
•quick and easy to set up
•large sums of money can be gained to finance new business ventures
DISAD:
•loss of assets may involve a leaseback agreement to retain use of asset, reduces profitabilty
•reduces the value of the business
describe and give 2 advantages and 1 disadvantage of:
increasing owner capital
existing owners may decide to increase their capital investment in the business
ADV:
•no interest to pay back
•no further dilution of ownership by bringing in more shareholders - get better dividends
DISAD:
•limited amount of funds available, so slow growth
List the short, medium and long term, of external sources of finace
SHORT:
•bank overdraft
•trade credit
•debt factoring
MEDIUM:
•bank loan
•hire purchase
•leasing
LONG: •mortgage •grants •share issue •debentures •venture capital
describe and give 2 advantages and 3 disadvantages of:
bank overdraft
withdrawing more money from a bank than the funds available
ADV:
•easy and quick to arrange
•good for short periods of cash flow problems
DISAD:
•high interest rates
•very expensive especially in the long term
•additional charges can occur if money withdrawn exceeds overdraft limit
describe and give an advantage and disadvantage of trade credit
purchasing from a supplier and paying it at a later date
ADV:
• Can help overcome cash flow problems because gives organisation time to sell their product before the invoice is due to be paid.
DISAD:
•failure to pay withing credit period may affect credit score and future credit being refused
Describe and give 2 advantages and 2 disadvantages of debt factoring
selling invoice debt to a factoring company , for less than its worth - damage limitation (dfs, carpet right)
ADV:
•guaranteed to receive a percentage of the amount due
•can save time and money as they don’t need to chase unpaid invoice
DISAD:
•organisation does not receive full amount of invoice
•debt factoring companies only want to buy large value invoices
describe and give 2 advantages and 2 disadvantages of bank loan
a lump sum received from the bank which in repaid in monthly installments
ADV:
•repaid in fixed installments - no pressure to pay back a large sum of money
•helps organisation to budget and plan since repayment is in monthly installments
DISAD:
•interest is paid back on top of money borrowed
•interest rates are higher for newly formed or high risk businesses
describe and 3 advantages and 2 disadvantage of hire purchase
Acquiring an item/asset with a deposit and repaying the balance in installments
ADV:
•can receive item immediately without paying in full
•cost of item is spread making it more affordable
•item is owned by organisation after paying the last installment
DISAD:
•interest could make the item too expensive
•item is not owned until all payments are made
Describe with a named example, and give 3 advantages and 2 disadvantages of leasing
Renting assets for a period of time e.g vehicles, IT equipment
ADV:
•cheaper than purchasing in full in the short term
•equipment is replaced when outdated
•may include a service contract where maintenance is included
DISAD:
•expensive in the long term
•organisation will never own the asset
describe and give 3 advantages and 2 disadvantages of a mortgage
- A loan used to purchase land and property.
- Payed back with interest in monthly installments over a long period of time (25 years)
ADV:
•lower interest rates than other bank loans
•repayment over a long period of time - makes it more affordable
•fixed interest rates can be arranged so organisation know what its monthly payments will be for the future - plan and budget
DISAD:
•if interest rates change repayment might increase
•payment defaults means asset can be repossessed
describe and give 2 advantages and 2 advantages of share issue
selling shares in the business to new shareholders
ADV:
•very large sums of money can be raised
•money invested through share issue is not repaid
DISAD:
•cost of issuing shares can be expensive and time consuming - sometimes paid up front
•the selling price of shares is subject to demand and selling price can rise and fall
describe and give 2 advantages and 2 disadvantages of debentures
- loans received from individuals/businesses
- repaid at a specific date in the future, with interest paid annual (10-20 years)
ADV:
•very large sum of money can be raised
•organisation pays the interest of the loan over the debenture period, which gives them a long time to raise the value of the loan
DISAD:
•high interest rates - even if organisation if making a loss the business has to pay them their interest
•if organisation is unable to repay interest or loan debenture-holder can sell that organisations assets
