1.3.4 Sources of business finance Flashcards
What is sources of finance?
Where a business can obtain money from
What do sources of finance assist with?
Business start up
operating costs
Expansion costs
What is short-term sources of finance?
Small amounts of borrowing, which must be repaid within one year
What are the different types of short-term finance?
Overdraft facility
Trade credit
What is overdraft facility?
When a bank allows a business to withdraw more money than it has in its accounts and pays back later
What are the advantages of an overdraft facility?
Quick, Convenient , Flexible:
Interest paid only on the amount of money borrowed and for the amount of time it is borrowed
What are the disadvantages of an overdraft facility?
High, variable rates of interest:
A bank may not grant the facility and can remove it at any time
What is trade credit?
When a business receives goods from a supplier immediately but agrees to pay them back later
What are the advantages of trade credit?
Business receives payment from customers before paying suppliers, removing the need to raise its own finance
What are the disadvantages of trade credit?
Not all suppliers offer trade credit:
Suppliers might charge a higher selling price
New businesses may not be offered trade credit until financial trust is gaines
What is long-term sources of finance?
Tend to be for larger amounts of money that are needed for longer periods of time
What are the different types of long-term finance?
Personal savings
Retained profit
Venture capital
Share capital
Bank loan
Crowdfunding
Sale of assets
What are personal savings?
Owner’s own money
What are the advantages of personal savings?
Quick and easy to obtain
No interest
What are the disadvantages of personal savings?
Might need the money for personal reasons
Might not want to risk losing the money
What are retained profits?
Profit made and kept from previous trading years
What are the advantages of retained profits?
Quick and easy to obtain
No interest
What are the disadvantages of retained profit?
Might need the money for other needs
Might not have any retained profits
What is venture capital?
Experienced business people with large capital offer venture capital to invest
What are the advantages of venture capital?
Larger capital sums
No need to repay
No interest
Risk carried by venture capitalists
Business advice and experience offered
What are the disadvantages of venture capital?
Loss of control of decisions
Profit is shared
May cause conflict with existing shareholders
What is share capital?
When a business owner sells shares in the business
What are the advantages of share capital?
No need to repay
No interest
Private limited companies can retain as much control as possible buy inviting family and friends to buy shares
Public limited companies can benefit from this quick way to raise significant capital
What are the disadvantages of share captial?
Profit is shared
May cause conflict with existing shareholders
Loss of control
Financial information becomes public
For private limited companies, finding investors might be difficult
For public limited companies, greater public scrutiny of business performance
For public limited companies, there is loss of control in the business and financial data becomes public
What is a bank loan?
Loan is a sum of money lent by a bank to a business to repay in monthly investments
What are the advantages of a bank loan?
Business retains control over business
Does not have to share profits
Fixed loan repayments, so it interest rates increase, loan repayments will remain the same
What are the disadvantages of bank loan?
takes time to arrange
Interest is charges
Bank might not grant loan
Inflexible as repayments must be made on time
Collateral is often required
What is crowd funding?
An online appeal made to attract multiple investors who wish to put in small amounts each
What are the advantages of crowdfunding?
Risk is shared amongst many
No interest
Can reach a wide number of investors
Acts as a method of promotion
A good way of testing a business idea
Does not need to be repaid
What are the disadvantages of crowdfunding?
If the overall target funds are not reached, finance is returned to investors
The reputation of the business may suffer if fundraising fails
A business idea may be copied by anyone who sees it on the Internet
Profits are shared
What is sale of assets?
When a business sells an item of value
What are the advantages of sales of assets?
No interest
Easy and convenient
Creates valuable space
What are the disadvantages of sale of assets?
Assets may not realise full market p[rice or not sell at all
Can be seen as a desperate measure
May regret selling assets that are needed in the future
