2.1 Flashcards
Give the 3 sources of internal finance?
Owners capital
retained profits
selling assests
Who might use owners capital?
Sole traders
partnerships
What are the benefits of owners capital?
No interest
easy access
no paybacks
What does owners capital depend on which is a negative?
The wealth of the owners.
What are the disadvantages of selling assets?
You might have to sell them lower because nobody wants them.- longer time to get cash
Small firms might not benefit since they don’t have much spare assets
You no longer owe the assets.
What are the advantages of selling assets?
Cheap source of finance - you don’t pay interest on what you’ve bought.
What are the disadvantages of retained profit?
Small firms can use this cos they wont be making enough profit.
What is one benefit of retained profit?
You don’t pay interest on it.
How can shareholders decline the use of retained profit?
They wont receive dividends from it.
Can a business miss out on anything from sticking to retained profits?
They can miss out on future investments.
Give all the external sources of finance? (6)
Peer to peer lenders
banks
business angels
other firms
friends and family
crowd funding
What are the benefits and drawbacks of using family and friends?
Advantages: flexible re-payments. No interest.
Disadvantages: If you don’t pay back on time this can strain your relationship
They cant give you a lot of money
What are benefits and drawbacks of using a bank loan?
Advantages: Recognised financial intuitions with clear financial products.
Can offer advice such as completing financial documents.
Drawbacks: strict lending criteria - high risk and start ups get higher interest rates
What are benefits of peer to peer lending?
Lower interest rates
good area to go to if bank has declined loan
What is peer to peer lending?
Lending companies like Zopa operate online. Individuals can invest to firms and other individuals.
Borrowers say how much they want to loan and how long for and lenders say how much they are willing to lend.
Zopa will connect the borrower with the lender
What are business angels?
Wealthy individuals that who invest money into new and innovative businesses who they think will be successful.
What are the advantages of using a business angel?
They offer advice and guidance
They have useful contacts
What are the disadvantages of using business angels?
They want a share in return which means they have control of decision making.
Can be time consuming to find a business angel.
What is crowd funding?
Raising money by using a large number of people via the internet. E.g Kickstarter
How can a firm crowd fund e .g the steps?
Go on website and put ideas down which everyone can see.
And explain what they need money for.
Can donators get rewards?
Yes they can get discounts and early access to the products
What is a benefit of crowdfunding?
Raises business awareness + product awareness. Which can increase sales even to those we didnt contribute
What are the drawbacks of crowdfundng?
Ideas can be stolen and another business may start them up before you
If business idea falls this may hurt reputation of your firm.
What is external finance of ‘other businesses’
Firm with huge retained profits might want invest in other business rather than save.
How can a firm finance to other businesses e.g which area
Buyer invests in supplier as it aids their own success. This improves buyer seller relationship.
What are drawbacks of investing in ‘other businesses’
They most likely want shares. They take control of decision making.
