119 business finance Flashcards
what is an internal source of finance
refers to money that comes from within a business eg. retained profit , sale of assets, working capital
what is an external source of finance
refers to money that comes from outside a business eg. family and friends , bank loans and overdrafts, venture capitalists, trade credit , commercial mortgage, share capital and government grants
what is sales of assets (i)
-this is when an established or large business sells assets that are no longer requires,such as buildings or machinery. the business can then reinvest this money by buying new bigger assets or paying for advertising campaigns
what is owner’s capital (i)
for small business, further investment of the sole trader’s or partner’s own capital (savings) may be the only method to raising money. risk taking entrepreneurs may sell their own assets eg.house to raise money to invest
what is reinvested profit (i)
this is money that is kept from previous years profits rather than given to the owners of the shareholders. this will provide an liquidity buffer(flow of cash that comes in out) and potential funds for growth
what is an overdraft (e)
the facility to withdraw more from an account than is in the bank account, resulting in a negative balance. business often depend upon authorised overdrafts to provide a working capital. they change interest on the amount withdrawn , and will only allow an overdraft if they believe the business is credit worthy (capable if paying the money back) - interest rates are high
what is a bank loan (e)
where a bank lends money to a business which must be repaid over a set period of time (usually 3-5 years), with interest.
bank will only lend if the business is creditworthy/ require security—.If the loan is not repaid, then the bank can take possession of the asset and sell the asset to get its money back
what is trade credit (e)
this is an interest free way to raise finance . businesses buy items such as fuel and raw materials and pay for them at a later date. the credit period is usually between 30-90 days , this allows the business to sell their products ensuring they have enough money to pay supplier back , delaying payments can ruin relationship with suppliers
what is leasing assets (e)
a method of gaining the use of capital goods whilst paying a monthly fee. leasing is similar to renting equipment eg. photocopiers, van. the business pays a regular amount for a period of time, but the item belongs to the leasing company, improving immediate cash flow
what is hire purchase (e)
similar to leasing but at the end of the hire period the asset belonged to the business that hires it -> a method of gaining the use of capital goods whist paying a monthly fee. hire purchase is where a business acquires an asset by paying a hire charge and a payment towards the purchase over a period of time.
what is a venture capitalist(e)
-they are professional investors who can invest large amounts of capital into growing businesses. venture capitalists will not only take a shareholding, they will expect to be fully involved in running the business
-they will appoint managers and advisors to help generate success and skills, allowing the business to grow at a speed that was previously impossible
-they expect quick growth and potentially large profits
what is debt factoring (e)
-a method of turning invoices into cash, (an invoice is a document that is used to record the sakes of goods and services from one party to another). banks and other financial organisations offer factoring services ,which pay a proportion of the value of an invoice (80-85%) when the invoice is issued. the balance, minus the fee, is paid to the business when the invoice is paid.
-they do this to gain access to cash right away rather than waiting at least 28 days to get the full amount
(+)/(-) of sales of assets
(+) create more space for profitable uses , free up cash invested in assets no longer used
(-) might need the assets in the future, or not be able to sell them
(+)/(-) of owners capital
(+) doesn’t require borrowing money , no interest to paid
(-) owner may not have enough savings or need cash for personal use
(+)/(-) of reinvested profit
(+) easy access to the money , no interest needs to be paid
(-) once the money is gone its not available for any unforeseen problems the business might face
(+)(-) of overdrafts
(+) quick access , can use it to fix cash flow problems, allows emergency purchases
(-) high interest rates , short term solution- needs to be repaid quickly
(+)/(-) of bank loan
(+) easy and quick to access , can get a significant amount of money , costs spread costs over a fixed term and make manageable payments
(-) pay interest, hard for new business , security in the form of assets
(+)/(-) of trade credit
(+) access to suppers without immediate payment , no interest ,
(-) short term , must be paid back quickly, usually small amounts
(+)/(-) of leasing assets
(+) no large upfront payments - cheaper in the short term
(-) more expensive in the long term because the leasing company charges fees that makes the total cost greater than the original cost, assets aren’t owned by the business
(+)/(-) of hire purchase
(+) expensive assets can be purchased and paid back over a long period of time (1-5 years)
(-) interest is changed in hire purchase items, equipment is not owned by the business until the final payment is made
(+)/(-) of venture capalists
(+) can potentially raise huge amounts of money , they offer advice and help maximising profit
(-) owner must give away part of the business , they may have different visions for the business
(+)/(-) of debt factoring
(+) good way of raising cash quickly if the business has a cash flow problem
(-) not good for profits since it reduces the total revenue received from those sales
finance for sole traders
for sole traders taking on a partner is a good way of helping fund investment, as they bring more capital (money) for investment, offer new skills which help a business grow. new partners ‘buy in’ and will be part ownership of the business
finance for LTDs
a LTD a share issue share issue can help fund large investment- this is the offering for sale of new shares in a business. for largest business eg.vodafone , there are billions of shares in issue - some shareholders owning hundreds of shares , and other big investors allowing millions to be raised. which can be used for investment into the business and expansion into new ventures
advantages/disadvantages of internal sources
(+) the money belongs to the business and no repayments are required or interest charged
(-) the amount of capital available to a business is often limited, or that the funds are insufficient to pay for what the business requires
