2.1.1/2 Sources Of Finance Flashcards
Sources of finance
The options available to a business when seeking to raise funds to support future business actions.
Internal sources of finance
• Retained profit.
• Selling assets.
• Owners capital.
Advantages and disadvantages of retained profit
+ No interest.
+ No loss of ownership.
+ Doesn’t need to be paid back.
- May not have any or enough.
- May reduce the profit used as a reward for business owners.
Advantages and disadvantages of owners capital
+ No interest.
+ No repayments.
+ Will generate a high level of commitment from the owner to protect their investment.
- Amount available likely to be limited.
- Can cause friction when multiple owners don’t invest the same amount.
Advantages and disadvantages of selling assets
+ No interest, no repayments.
+ Can sell things that the business no longer needs.
+ Reduced cost of maintenance or upkeep of the asset.
- May not have assets to sell.
- Unlikley that the amount received will be a true reflection of asset value.
- Can increase costs in the long run if asset needs to be leased back.
The need for finance
• Capital expenditure = spending on business resources that can be used repeatedly over a period of time (in the long term).
• Revenue expenditure = spending on business resources that have already been consumed or will be very shortly.
External finance
Capital raised from outside of the business.
Source of finance
Where the finance is coming from.
Method of finance
How the finance is provided
Examples of external sources of finance
• Family and friends.
• Banks.
• Peer to peer lenders.
• Business angles.
• Crowd funding.
• Other businesses.
Advantages and disadvantages of family and friends
+ Doesn’t have to be repaid.
+ Can be flexible with low/no interest.
- Can cause friction if something goes wrong with the business, or if they want to be involved in decisions.
Advantages and disadvantages of banks
+ Recognised financial institutions.
+ Terms and conditions of financial products are clear.
+ They can advise a business and provide other services, such as completing financial documents.
- Strict lending criteria.
Advantages and disadvantages of peer-to-peer lenders
When other business owners or individuals lend money in return for interest.
+ Lower interest rates.
+ Quick access to finance.
+ Good option if a bank has refused to provide a loan.
- Not suitable for large amounts.
- Pay back terms are very short.
Advantages and disadvantages of business angels
Wealthy individuals who invest money into new or innovative business that they think has the potential to be successful.
+ Lots of business knowledge and useful contacts.
- Loose equity - less control over decision making and loose share of profits.
Advantages and disadvantages of crowd funding
When lots of individuals give small amounts to businesses who are worth while in some way.
+ Flexible in the way founders are rewarded.
+ Risky projects can attract funding.
- May not raise as much as you need.
Advantages and disadvantages of other businesses
Businesses with a healthy cash balance may invest in other businesses.
+ May be a good source of cash if on good terms.
- May have specific terms (shares in business).
- May require repayment with interest.
Examples of methods of finance
• Overdrafts.
• Loans.
• Leasing.
• Grants.
• Trade credit.
• Share capital.
• Venture capital.
Advantages and disadvantages of overdrafts
When a business pre-arranges with the bank that it can spend more than it has in its current account.
+ Flexible and only used when needed.
- High interest rates.
- Small amounts of finance.
Advantages and disadvantages of loans
When someone borrows a set amount from the bank with a fixed repayment term and interest.
+ Large amounts can be borrowed.
+ Repayments are predictable.
+ Don’t loose any control.
- High interest rates.
- Difficult to secure.
Advantages and disadvantages of leasing
Paying monthly sums of money over a set period of time, in return for the use of the asset. After the lease period the asset is often returned to the leasing firm.
+ Business doesn’t have pay a large up-front sum of money to buy the asset.
+ No costs of maintenance and repair.
- More costly in the long run.
Advantages and disadvantages of grants
A fixed sum of money given to a business often by a government.
+ Doesn’t have to be paid back.
+ No interest.
+ No share of the business has to be given up.
- Application process can be long and time-consuming and may not get grant.
- Small amounts of money, not given until end of project.
- Strict criteria on how money can be spent.
Advantages and disadvantages of trade credit
When a business buys a good or service and doesn’t have to pay straight away - an agreed time limit.
+ Can help a business with cash flow.
- Miss out on discounts of paying up front.
- Failure to pay on time can mean they are charged interest.
Advantages and disadvantages of share capital
Money raised by selling shares.
+ Doesn’t need to be repaid.
+ Shareholders can bring expertise or the business.
- Loss of control.
- Shareholders expect a share of the profits as dividends.
Advantages and disadvantages of venture capital
Money that can be used for a business that is high risk but has the potential to be successful. Venture capital can be provided by business angels or by professional employees (venture capitalists) working on behalf of a venture capital firm.
+ Provide much more money than business angels.
+ Businesses that have been refused finance from other sources may seek the investment of a venture-capitalist.
- Venture-capitalists usually require a stake in the business and often expect to exert some control over the business.
