2.1 Finance Flashcards
What are the internal sources of finance?
Owners capital, retained profit, sale of assets, sale and leaseback of assets
What is owners capital? (Internal)
Is where owners provide capital from their own personal resources such as personal savings, redundancy payments, inheritance and re-mortgaging their home. There is a lot of risk. Typically used by sole traders and partnerships
Owners may also have no spare funds
What is retained profit? (Internal)
Profit after tax that is reinvested into the business and not returned to the owners. Is not available for start up businesses. Helps business grow. There is also no interest to pay
But amount of money available might be limited
Shareholders might resist the use of retained profit to grow the business and want higher dividends instead of
What is sale of assets? (Internal)
Where established businesses sell unwanted assets to raise finance. Assets could include property/ buildings, machinery, land, obsolete stock and sometimes part of a business. However once sold it will not appear on the asset sheet (looks bad)
May draw questions to how well business is run if they have to sell assets
May be no suitable assets to sell
Is quick cash, can get money quickly
What is sale and leaseback of assets
When a business sells assets but leasing the back from the person the assets. Used when cash is needed but the business still needs to use the asset
What are the external sources of finance?
Family and friends, banks, peer to peer lending, business angels, crowdfunding, other businesses
Explain family and friends
Funding from family and friends typically in the form of a gift or loan.
Interest rates are like to be low
However amount may be too small
Relationships can also suffer if there is difficulties in repaying the amount borrowed
Explain banks as a source of finance
Provide loans, overdraft and mortgages to businesses. Requires a formal application and a business plan (normally for start up businesses)
However there is normally a high interest rate
