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Business Theme 2 > 2.1.1/2 INTERNAL/EXTERNAL FINANCE > Flashcards

2.1.1/2 INTERNAL/EXTERNAL FINANCE Flashcards

1
Q

what is owners capital

A

personal savings of the original owner of a business

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2
Q

what is retained profit

A

the profit that has been generated in previous years and not distributed to owners is reinvested back into the business

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3
Q

what is sale of assets

A

selling of business assets which are no longer required generates a source of finance

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4
Q

benefits of using internal finance

A
  • doesn’t include 3rd parties who may want to influence business decisions
  • often free and no payment of interest
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5
Q

disadvantages of using internal finance

A
  • significant opportunity cost
  • may not be sufficient funds
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6
Q

what is external finance

A

sourced from outside the business

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7
Q

what is internal finance

A

sourced from within the business

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8
Q

advantage of family and friends finance

A
  • usually a very cheap source of funds
  • may have ‘no strings attached’
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9
Q

disadvantage of family and friends finance

A
  • relationships may be damaged if the finance isn’t repaid
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10
Q

banks as a source of finance

A

they provide several types of loans to businesses

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11
Q

advantages of bank loans

A
  • may offer both short and long term finance
  • often provide free advice
  • quick to obtain
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12
Q

disadvantages of bank loans

A
  • business plan is required to obtain one
  • interest
  • businesses must be customers of the bank to request a loan
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13
Q

what’s peer to peer funding

A

individuals with savings available to them often take this money and pool it with others in a peer investment scheme such as a funding circle

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14
Q

advantages of using p2p funding

A

funding circle can then make loans available to businesses very quickly

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15
Q

disadvantages of using p2p funding

A

borrowers are charged a fee to access finance and have to pay interest

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16
Q

what are business angels

A

wealthy individuals who invest in small startups for a stake in the company, offering not just funds but also expertise and networking

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17
Q

advantages of business angels

A
  • tend to be more willing to take a risk than banks are
  • they have experience and expertise
18
Q

disadvantages of business angels

A
  • potential conflicts over decision making
  • risk of loosing control over the business
19
Q

what’s crowdfunding

A

collecting small amounts of money from a large number of people, typically through online platforms

20
Q

advantages of crowdfunding

A
  • access to a large pool of potential investors, - increased exposure for the business
  • validation of the idea by the crowd
  • potential for early customer engagement
21
Q

disadvantages of crowdfunding

A

-the need to meet campaign goals to receive funds
- platform fees
- potential intellectual property risks
- the challenge of standing out among many campaigns

22
Q

what is share capital

A

finance raised from the sale of shares in a limited company

23
Q

advantages of share capital

A
  • raising funds without incurring debt
  • sharing financial risk among shareholders
  • attracting investors with profit-sharing potential
  • enhancing the company’s credibility
24
Q

disadvantages of share capital

A
  • dilution of ownership for existing shareholders
  • potential loss of control over decision-making - the obligation to pay dividends to shareholders
25
Q

what is venture capital

A

funds provided by specialist investors in small to medium sized businesses that have significant potential for growth

26
Q

advantages of venture capital

A
  • access to substantial funding
  • expertise and guidance from experienced investors
  • networking opportunities
  • potential for rapid business growth
27
Q

disadvantages of venture capital

A
  • loss of control and decision-making power
  • pressure to achieve high growth targets
  • potential conflicts with investors
  • the need to give up equity in the business
28
Q

what’s an overdraft

A

an arrangement for business current account holders to spend more money than it has in their account

29
Q

advantages of overdrafts

A
  • flexibility in borrowing
  • quick access to funds
  • interest charged only on the amount overdrawn
  • the ability to cover short-term cash flow gaps
30
Q

disadvantages of overdrafts

A
  • high-interest rates
  • potential for unexpected fees
  • dependency on short-term borrowing
  • the risk of overdrawing beyond the agreed limit
31
Q

what is leasing

A

an asset such as a piece of machinery is used by the business in return for regular payments to the suppliers

32
Q

advantages of leasing

A
  • the business doesn’t own the asset so is not responsible for maintenance or repair costs
  • lower initial costs
  • access to newer equipment
  • flexibility to upgrade
  • potential tax benefits
33
Q

disadvantages of leasing

A
  • higher overall costs compared to purchasing
  • restrictions on customisation
  • potential for long-term financial commitments
  • the lack of ownership of the leased assets
34
Q

what is trade credit

A

when an agreement is made with suppliers to buy raw materials which are payed for at a later date

35
Q

advantages of trade credit

A
  • usually interest free
  • improved cash flow
  • potential for extended payment terms
  • opportunity to build relationships with suppliers
  • flexibility in managing short-term financing needs
36
Q

disadvantages of trade credit

A
  • potential strain on supplier relationships
  • higher overall costs due to interest or fees
  • risk of dependency on credit terms
  • the impact on credit ratings if payments are delayed
37
Q

what are grants

A

when governments and industry trusts may offer grants to businesses that meet specific criteria

38
Q

advantages of grants

A
  • don’t need to be repaid
39
Q

disadvantages of grants

A
  • restrictions on fund usage
  • reporting requirement
40
Q

what is unlimited liability

A
41
Q
A

Business Theme 2 (11 decks)

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