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EdExcel GCSE Business > 1.3.4 Sources of Business Finance > Flashcards

1.3.4 Sources of Business Finance Flashcards

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1
Q

What are short-term sources of business finance?

A
  • bank overdraft
  • trade credit
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2
Q

What are long-term sources of business finance?

A
  • personal savings/sources
  • loans (bank)
  • share capital
  • venture capital
  • retained profit
  • crowdfunding
  • grants
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3
Q

Bank overdraft:

A
  • short-term source of finance that is available to help fund the day-to-day payments required by a business
  • allows the business to withdraw funds from its accounts that are not there, up to an agreed maximum limits and is only used when the business requires additional, temporary amounts of money
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4
Q

Benefits of using bank overdraft as a source of finance for businesses:

A
  • offers flexibility important source of finance for a business if it has a short-term shortage of cash or unexpected cost to pay
  • interest only paid on amount used
  • covers short-term expenses that can be repaid quickly
  • helps solve cash-flow problems as negative cash flow in an immediate problem so it required short-terms source of finance to resolve the problem
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5
Q

Drawbacks of using bank overdraft as a source of finance for businesses:

A
  • repayable to bank at any time
  • a bank may lower or even withdraw the overdraft facility at any time
  • usually has high levels of interest; using overdrafts is therefore an expensive form of finance → higher fixed costs → as a result profits of the business may fall
  • short term source of finance → means they are not used to secure finance for long-term projects → as a result, businesses may not be able to fund investments such as new buildings
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6
Q

Trade credit:

A

trade credit is provided by a firm’s suppliers, allowing the business to have the goods now and pay for them at a later date

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7
Q

Benefits of using trade credit as a source of finance for businesses:

A
  • trade credit can allow the business to use the goods in the manufacturing and/or sell the goods before it pays the suppliers, which will improve its cash-flow position
    • paying for stock or goods later (e.g. 30 days or 60 days after), when the goods gave already been sold
    • helps solve cash-flow problems as negative cash flow in an immediate problem so it required short-terms source of finance to resolve the problem
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8
Q

Drawbacks of using trade credit as a source of finance for businesses:

A
  • danger of bad reputation and losing future credit arrangements with these upper, if bills are not paid on time
  • difficult for new start-up businesses to negotiate trade credit withs suppliers, as there is a risk that the businesses will fail and suppliers may not end up getting paid
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9
Q

Personal savings/sources:

A
  • an entrepreneur will often invest personal savings, redundancy or inheritance money into a start-up
  • can also be in the form of providing assets for the business e.g. an entrepreneur using his/her own car
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10
Q

Benefits of personal saving/sources as a source of finance for businesses:

A
  • provides a strong signal to other potential investors and the bank of the entrepreneurs commitment to the business
  • interest free readily available and maximises control the entrepreneurs keeps over business
  • coverings short-term expenses that can be repaid quickly
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11
Q

Drawbacks of personal saving/sources as a source of finance for businesses:

A

amount that is available may be limited, resulting in the entrepreneur having to use other sources of finance to fund the business

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12
Q

Bank loan:

A
  • an amount of money borrowed for a set period with an agreed repayment schedule
  • the repayment amount will depend on size and duration of loan, as well as rate of interest
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13
Q

Benefits of using bank loans as a source of finance for businesses:

A
  • business is guaranteed the money for a certain period - generally 3-10 yrs
  • no need to provide bank with share in business, so no control is lost
  • interest rates may be fixed for the term, making it easier for an entrepreneur to forecast interest payments and cash-flow
  • repayments are made in instalments meaning the business can access substantial amounts of cash that doesn’t need to be paid in one go
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14
Q

Drawbacks of using bank loans as a source of finance for businesses:

A
  • time consuming - a new business would need to produce a detailed business plan in order to gain a bank loan
  • security - normally has to be given to the bank on of the assets of the business/entrepreneur’s personal assets; the bank will have control over these assets if the business fails
  • lack of flexibility - a small business might take a loan out for £50,000, but finds it only needed £30,000; interest must be paid on the full loan amount, which increases the cost of the business
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15
Q

Share capital:

A
  • small or new businesses that are set up as private limited companies can raise finance by selling shares in the company
  • a limited company can sell shares to potential investors to raise capital - these investors are then shareholders in the business and are entitle to share of any profits that are generated
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16
Q

Benefits of share capital as a source of finance for businesses:

A
  • large sums of money can be raised by selling equity in a limited company
  • capital onset have to be repaid
17
Q

Drawbacks of share capital as a source of finance for businesses:

A
  • possible loss of control if the original owners sell more than 50% of the total shares
  • need to satisfy shareholders expectations of dividends and share price growth
  • no interest - dividend payments can be missed if profits are low
18
Q

Venture capital:

A
  • venture capital can be gained from professional investors, who typically invest £10,000 - £750,000 into a business that may be seen as high risk but have the potential to be very successful
  • venture capitalists tend to have made their own money by setting up and selling their own business - in other words they have proven entrepreneurial expertise
19
Q

Benefits of venture capital as a source of finance for businesses:

A
  • venture capitalists often make their own skills, experience and contacts available to the firm
  • raising capital from investors to fund a new idea - venture capitalists have access to large amounts of funds
20
Q

Drawbacks of venture capital as a source of finance for businesses:

A
  • the venture capital company or investors will usually want a share of the business and of the profits, which an result in some loss of control over the firm for the entrepreneur which they might not want to give up
  • unless a business can offer the prospect of significant turnover growth within five years, it is unlikely to be of interest to a venture capital firm
21
Q

Retained profit:

A

when a business has worked out its profits, the owners or shareholder and decide whether to take the profits for themselves of reinvest the profits back into the business to ensure it continues growing

22
Q

Benefits of retained profit as a source of finance for businesses:

A
  • a cheap form of finance, as no interest has to be paid
  • flexible - business owners have complete control over how any profits are reinvested and the proportion that is kept in the business, rather than paid out of dividends
  • retained profits do not dilute or reduce the ownership of the organisation so for companies, there is no risk of takeover
23
Q

Drawbacks of retained profit as a source of finance for businesses:

A
  • if a business needs some temporary finance because it is facing difficulties, then it is unlikely to have any profits that it can use
  • growth may be slow if it is dependent on retained profits, as profits may not be high enough to finance the growth quickly
  • using too many profits in the business, may upset shareholders, who feel that their dividend payments are too low
24
Q

Crowdfunding:

A

a way of raising money through a crowd funding platform, publicising a proposal seeking to attract a large number of worldwide small investors

25
Q

Benefits of crowdfunding as a source of finance for businesses:

A
  • provides cheap investments when other sources of external finance may not be available
  • if the project is newsworthy, it might attract good publicity
  • social media can be easily used to keep investors informed of the progress of the business venture, which might then provide ongoing finance
  • investors may have experience or skills that they can offer the business
26
Q

Drawbacks of crowdfunding as a source of finance for businesses:

A
  • investors will need to be offered a return; this might be free use of the good or service produced or a share in the profits - some schemes will also provide shares, which dilutes the control of the original owners of the business
  • risk that there will be a limit to the amount of money investors are willing to invest
  • the business idea may not be of interest and attract little finance; time and money spent organising the crowdfunding campaign will be lost
27
Q

Grants:

A

when a business is provided money (usually from the government) for a specific project

28
Q

Benefits of grant as a source of finance for businesses:

A
  • helps to start a business
  • cheap form of finance as no interest needs to be paid
  • don’t have to pay back money given through grant
  • allows original owners/entrepreneurs to keep control over their business
29
Q

Drawbacks of grant as a source of finance for businesses:

A
  • grants only provided to businesses for thing the government/grant provider wants to happen or wants more of e.g. environmental projects
  • lots of admin involved in applying for grants
30
Q

Factors affecting choice of finance:

A
  • amount needed
  • reason why finance is required
  • circumstances of the business
  • legal state the business has
31
Q

Key decisions for an entrepreneur:

A
  1. How much finance required?
  2. When is finance needed?
  3. How long is the finance needed for?
  4. What security (if any) can be provided?
  5. Is the owner prepared to give up any ownership and control of the business?
32
Q

Why might businesses need finance?

A
  • to pay for starting up business/expanding business
  • paying for expenses e.g. wages
  • investing in new products and services
  • paying for unforeseen costs
33
Q

Share:

A

a part of ownership in a business

EdExcel GCSE Business (38 decks)

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