1.2.7 Sources of Finance Flashcards
1
Q
Equity capital
A
- Money contributed to a business by an investor
- In exchange for partial ownership
2
Q
Advantages of equity capital
A
- Doesn’t have to be repaid unless owner leaves the business
- No interest (cheaper)
- An owner who contributes the equity to a business retains control over how that finance is used
3
Q
Disadvantages of equity capital
A
- A small amount of finance may only generate low profits + low returns
4
Q
Personal equity
A
- Acquired by a business owner contributing their own funds to their business
- E.g. savings
5
Q
Debt capital
A
- Money that has been lent to a business
- By an external source
6
Q
Advantages of debt capital
A
- Leverage: allows a company to quickly grow a small of value
- Tax: company doesn’t have to pay tax on debt capital
- Ownership: acquiring debt capital doesn’t cost you ownership like equity does
7
Q
Disadvantages of debt capital
A
- Interest: potentially makes it very expensive
- Obligations: company is obliged to repay the debt
- Default: when the company can’t repay the debt, it defaults on the loan + loses its collateral
8
Q
Overdraft facilities
A
- Agreements
- Between banks + businesses/individuals
- Allow a bank account to be withdrawn below zero
9
Q
Advantages of overdraft facilities
A
- Short-term source of finance
10
Q
Disadvantage of overdraft facilities
A
- High interst
11
Q
Trade credit
A
- When a supplier provides product to a business
- With an agreement to charge for the goods/services later
12
Q
Disadvantages of trade credit
A
- May not be available for all suppliers
- Late fees may apply
- Will increase the amount of debt of the firm
13
Q
Advantages of trade credit
A
- Can get supplies straight away
- Time to source the money to pay the account (usually 30-60 days)
- Discount for early payment
- No interest
14
Q
Term loan
A
- Loan for a specific purpose
- Repaid over time
15
Q
Loan
A
Money that has been borrowed
16
Q
Mortgage
A
- A loan on a property
- Secured by the property of the borrower (the business)
- (i.e. term loan secured against property)
17
Q
Advantages of term loans
A
- Allows a business to purchase expensive assets
- Flexible: can be used for a variety of purposes
- Lower interest for secured loans
18
Q
Disadvantages of term loans
A
- Interest charges (higher for unsecured loans)
- Loans need to be repaid
- Can put pressure on cash flows
19
Q
Leasing
A
- A way of financing the purchase of assets
- Without the large initial purchase fee
20
Q
Advantages of leasing
A
- Reduces cost of some assets
- Allows assets to be updated after a couple of years (vehicles, computers)
- Reduces maintenance + repair costs
21
Q
Disadvantages of leasing
A
- No ownership of asset
- Annual payments must be made for the term of the lease
22
Q
Crowdfunding
A
- Method of raising finance
- Through appeals for donations
- Via social media + the internet
- E.g. GoFundMe
23
Q
Advantages of crowdfunding
A
- Quick way to raise finances
- Business owners can connect with potential customers
- Can receive feedback + guidance on how to improve the product
24
Q
Disadvantages of crowdfunding
A
- Takes a lot of work to get your product noticed
- Not guaranteed to reach funding target
- Failed projects may damage business reputation
25
Q
Grants
A
- Money given by a government or another organisation
- For a particular reason
26
Q
Factors affecting the choice of finance
A
- Term of finance (amount of repayments + how often) should match asset
- Overall cost: interest cost considered
- Business structure: large businesses have more opportunity for equity capital than small ones
- Level of control: most owners wish to retain as much control possible
- Flexibility
27
Q
Sources of finance
A
- Equity capital: personal equity
- Debt capital
- Overdraft facilities
- Trade credit
- Term loans
- Leasing
- Crowdfunding
- Grants
