2.2 - Sources of Finance Flashcards
Definition of Owner’s Capital
Money introduced by the existing owner
NoNo
Advantages of Owner’s Capital
- No interest or repayments
- No loss of control to shareholders
MS
Disadvantages of Owner’s Capital
- May not be enough cash avaliable from current owner
- Slow way of financing expansion, may miss potential profits
Definition of Partners Capital
Money invested by existing partners
Double N
Advantages of Partners Capital
- No interest or repayments
- New partners can add expertise and share workloads
PC Partner
Disadvantages of Partners Capital
- Partners may not be able to contribute enough capital
- Control of the business and profits must be shared amongst partners
Definition of Share Capital
Money invested by shareholders, giving them ownership of the company
ENDS
Advantages of Share Capital
- No interest or repayments
- Dividends only paid from what the company can afford
- Shares reduce levels of capital gearing
PeoPLe
Disadvantages of Share Capital
- Parts of the profits will need to be paid to shareholders
- Potential loss of control
- Large amounts paid can damage cash flow
Definition of Debentures
Long-term loans that can be secured against assets of the company
Triple No
Advantages of Debentures
- No loss of control
- No repayments for several years
- No repayments or interest after an agreed date
RILI
Disadvantages of Debentures
- Risky
- Interest payable, regardless of financial position of the company
- Large repayments in one lump sum can damage cash flow
- Increases capital gearing
Definition of Bank Loan
Fixed amount that must be repayed with interest over a certain amount of time in equal monthly installments
Triple No
Advantages of Bank Loans
- No further payments after the period
- No loss of ownership
- No lump sum repayments - good for cash flow
IRI
Disadvantages of Bank Loans
- Interest is an addition cost
- Repayments must be made, regardless of financial position
- Increases capital gearing
Definition of Mortgages
Bank loan used to purchase property
ANN
Advantages of Mortgages
- Affordable way of purchasing or improving property
- No repayments after a set period
- No loss of ownership
PIL
Disadvantages of Mortgages
- Property used as security, so can be repossessed
- Interest is an additional cost
- Large deposit may cause cash flow issues
Definition of Bank Overdraft
When the business bank account has a negative balance
FERN
Advantages of Bank Overdraft
- Flexible as the business only borrows and pays interest on what is needed
- Repaid when the business is able to
- No loss of ownership
ROI
Disadvantages of Bank Overdraft
- Rate of interest is often higher than bank loans
- Overdraft facility can be cancelled by the bank without notice
- Interest is an additional cost
