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Business > 2.1 Sources and Methods of Finance > Flashcards

2.1 Sources and Methods of Finance Flashcards

1
Q

Examples of internal finance

A
  • Owner’s capital (personal savings) Sole trader and partnerships only
  • Retained profit
  • Sale of assets
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2
Q

Advantages of internal finance

A
  • Doesn’t need to be paid back
  • Easy and quick to obtain
  • Maintain control
  • No negotiation
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3
Q

Disadvantages of internal finance

A
  • No longer own assets
  • May not be as much as external sources
  • Owner’s capital isn’t an option for Ltds or plcs
  • Often short-term
  • Takes a long time to re-save
  • Don’t have in case of emergency
  • New businesses can’t use retained profit
  • Sale of assets devalues a business
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4
Q

Sources of external finance

A
  • Family and friends
  • Banks
  • Peer to peer funding
  • Business angels
  • Crowdfunding
  • Other businesses
  • Government (not on spec)
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5
Q

Methods of external finance

A
  • Loans
  • Share capital
  • Venture capital
  • Overdraft
  • Leasing
  • Trade credit
  • Grants
  • Donation (not on spec)
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6
Q

What is a loan used for?

A

It provides medium to long-term finance for capital expenditure.

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7
Q

What is share capital used for?

A

To raise long-term finance, determine ownership and transfer ownership from one party to another.

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8
Q

What is venture capital used for?

A

To support startups and other businesses with the potential for substantial and rapid growth.

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9
Q

What is an overdraft used for?

A

It allows a business to bridge short-term cash flow gaps, pay urgent bills, or cover unexpected expenses.

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10
Q

What is leasing used for?

A

Used to provide flexibility and protection against technological obsolescence (becoming outdated).

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11
Q

What is trade credit used for?

A

It allows a business to obtain goods with payment due at a later date at no extra charge.

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12
Q

What is a grant used for?

A

It’s awarded to your business to assist in its development, often for a specific purpose.

e.g. Providing public services, stimulating the economy

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13
Q

Advantages of a loan from family and friends

A
  • Minimal or no interest may be charged
  • Often more flexibility in repayments
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14
Q

Disadvantages of a loan from family and friends

A
  • Can lead to conflict
  • Money may need to be recalled for personal use
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15
Q

Advantages of share capital from family and friends

A
  • May be willing to offer share capital for a small or no return in early years
  • May offer with the option of buying back shares once established
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16
Q

Disadvantages of share capital from family and friends

A
  • They may feel they have the right to ask for the money back if it is needed
  • Owner may feel added pressure to provide returns for family members
17
Q

Advantages of a loan from a bank

A
  • Clear repayment plan
  • Cost of borrowing (interest) agreed at the start of the loan
18
Q

Disadvantages of a loan from a bank

A
  • Lack of flexibility
  • Interest added on loans can be significant
19
Q

Advantage of an overdraft from a bank

A
  • A more flexible method of finance (limit agreed in advanced to use when required)
20
Q

Disadvantages of an overdraft from a bank

A
  • Interest is charged and may be high
  • Finance being ‘available’ may encourage business to fall into debt
21
Q

Advantages of a loan via peer to peer funding

A
  • Interest rates tend to be lower than bank loans and overdrafts
  • Usually arranged online and can be a quick process
22
Q

Disadvantages of a loan via peer to peer funding

A
  • Lender is unknown
  • Amount that can be borrowed may be limited compared to traditional banks
  • Fairly new approach to borrowing (limited history of success at present)
23
Q

Advantages of share capital from a business angel

A
  • May offer finances as well as experience in the industry
  • May accept low returns (dividend) on investment in early years
  • Attractive for start-up businesses
24
Q

Disadvantages of share capital from a business angel

A
  • Locating angels suited to business can be difficult
  • Likely to be unknown to owner
  • Owner relinquishes part share of the business to angel
25
Q

Advantages of share capital via crowdfunding

A
  • May be able to raise small or large amounts of capital
  • Can accept very small investments
  • Usually arranged on online websites so process can be quick with guidance from website
26
Q

Disadvantages of share capital via crowdfunding

A
  • Investors are likely to be unknown yet the owner is offering part ownership
  • Source of money is unclear (limited checks on investors)
27
Q

Advantages of a loan via crowdfunding

A
  • May offer low interest rates
  • Can offer more flexibility in repayments
28
Q

Disadvantage of a loan via crowdfunding

A
  • Source of money is unclear (limited checks on investors)
29
Q

Advantages of a donation via crowdfunding

A
  • Money doesn’t have to be repaid
  • No interest charges or dividends to pay
30
Q

Disadvantages of a donation via crowdfunding

A
  • May be limited response so may not raise sufficient funds
  • Source of money is unclear (limited checks on investors)
31
Q

Advantages of leasing from other businesses

A
  • Access to assets without having to pay in full
  • Can be a short-term commitment to allow business to assess what it actually needs to consider buying
32
Q

Disadvantages of leasing from other businesses

A
  • Money spent is a cost to the business without ownership of asset unless there is an option to buy at the end of the contract
  • Can be expensive in the long-term
33
Q

Advantages of trade credit from other businesses

A
  • Short-term source without additional charges is managed well (paying on time)
  • Accessible form of finance as businesses become more established
34
Q

Disadvantages of trade credit from other businesses

A
  • If payment is delayed can attract charges/interest
  • If poorly managed can result in a poor relationship and reputation
35
Q

Advantages of venture capital from other businesses

A
  • Often take more of a risk than banks
  • May also offer guidance and support
36
Q

Disadvantages of venture capital from other businesses

A
  • May expect part-ownership of the business (diluting control)
  • Can charge high rates of interest on loans if others have rejected to lending
37
Q

Advantages of a grant from the government

A
  • Access to money that doesn’t need to be repaid
  • Can be essential to getting started for some businesses
38
Q

Disadvantages of a grant from the government

A
  • Difficult to access funds (lengthy detailed application procedures)
  • Monitored by government departments

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