2.1 Flashcards
why do businesses need money?
-start up costs (research, promotion, assets)
-to expand or grow
-working capital (cover day to day running costs)
what is internal finance?
capital/funds raised from within the business
what are three types of internal finance?
-owners capital/personal savings
-retained profit
-sale of assets
what are advantages of internal finance?
-available immediately
-no interest payments
-no credit checks (checks stability)
what are disadvantages of internal finance?
-might not be enough
-not as flexible as external (lots of sources are external)
external finance:
what are advantages and disadvantages of borrowing from family and friends?
advantages- no interest
disadvantages- might not be enough, pressure
external finance:
what are advantages and disadvantages of a bank overdraft?
advantages- instant, so it improves cash flow
disadvantages- high interest rates (increases risk)
what is a secured loan?
where the lender requires security, such as property, to provide protection in case the borrow defaults
what is an unsecured loan?
lender has no protection if the borrower fails to repay the money owned
external finance:
what are advantages and disadvantages of a bank loan?
advantages- good rates if business is established (seen as low risk), can get amount needed, provides guidance through setting up a business
disadvantages: paid back with interest
what is p2p lending?
peer to peer lending is where individuals lend to other individuals without prior knowledge to them, on the internet
external finance:
what are advantages and disadvantages of p2p lending?
advantages-higher returns than savings account
disadvantages-high risk as if company goes bust, you’re not covered up to £85,000 like with banks
what is venture capital?
providers of funds of small or medium companies that may be considered too risky for other investors
external finance:
what are advantages and disadvantages of venture capital?
advantages- advice and finance
disadvantages- lose some ownership of the business
what are business angels?
providers of funds between £10,000-£100,000 +, often in exchange for a stake in the business, investments less risky than those of venture capitalists
external finance:
what are advantages and disadvantages of business angels?
advantages- advice & finance
disadvantages- lose some ownership of the business, finding a suitable angle
what are advantages and disadvantages of crowdfunding?
advantages- potential to raise large amount with campaign
disadvantages- investors get a share in the business or payment with interest, might not raise the amount needed
what is share capital?
the money introduced into the business through the sale of shares, only for limited businesses
external finance:
what are advantages and disadvantages of share capital?
advantages- potential to raise a lot of capital for expansion, no interest paid, doesn’t have to be paid back
disadvantages- lose decision making power, new share holders may take over the business, have to share profits in the form of dividends
external finance:
what is trade credit?
a business obtains it’s stock from suppliers but doesn’t pay immediately, average credit period is 2 months
what is an advantage of trade credit?
improves cash flow
what are disadvantages of trade credit?
-not suitable for large amounts
-can lead to liquidity issues or bankruptcy
external finance:
what is a grant?
businesses starting up may be eligible for grants given by the government or charities, such as the princess trust
what is an advantage of a grant?
doesn’t have to be repaid
what is a disadvantage of a grant?
have to meet certain criteria to qualify
what are advantages of a mortgage?
potential to raise a large amount
what is a disadvantage of a mortgage?
has to be paid back with interest
what are factors to consider when choosing a source of finance?
-amount of money required
-the cheapest option available
-how quickly the money is needed
what is limited liability?
owner and business have separate legal identities
-owner can only lose amount invested in business
what is unlimited liability?
owner and business seen as one if business has debts
-owner is responsible, even if it means selling personal possessions
sole traders dont have access to ____ _____
share capital
what is a business plan?
a report describing the marketing strategy, operation issues and financial implications of a business start up
the purpose of a business plan is to improve likelihood of success of a business by?
-helping to clarify objectives & identify what needs to be done & meet them
-persuasion lenders to invest capital
-being used as a valuable tool to help running the business
cash is the _______ _____ _____
immediate spending power
businesses need cash to pay what?
bills, rent, wages, suppliers, electricity
without cash you can’t pay bills so can therefore be what?
forced out of the business
what is net cash flow?
total cash payments (inflows) into a business minus total cash payments out of a business (outflows)
what are cash inflows?
payments received by a business such as those from customers or from a bank (loan)
what are cash outflows?
payments made by a business such as those to suppliers and employees
what is liquidation?
turning assets into cash & may be insisted on by courts if suppliers have not been paid
what is the opening balance?
cash held by the business at the start of the month
what is the closing balance?
cash held at the end of each month, becomes the next months opening balance
