3.1 Sources of Finance Flashcards
Capital Expenditure
Spending on a firm’s fixed assets
Revenue Expenditure
Spending on a firm’s general operational costs (day-to-day business expenses)
Fixed asset
An asset that is expected to last for more than a year in the business
Liquidity
The ability of a firm to pay its short-term debts
Solvency
The ability of a firm to pay its long-term debts
Internal sources of finance
Funds that come from within the business using their existing assets (eg. personal funds, retained profits, and sale of assets)
External sources of finance
Funds that come from outside the business, involving an external stakeholder taking a risk and investing in the company
Personal funds
A source of finance for sole traders that comes from their own personal savings
Retained profits
Profit that remains after all deductions, including dividends to shareholders, have been made
Sale of assets
When a business sells off its unwanted or unused assets to raise funds
Sale and lease back
Business selling a fixed asset but immediately leasing the asset back (ownership is transferred to leasing company)
Equity finance
Long-term funds provided to a business in return for part ownership which does not have to be repaid
Share capital
Money raised through the issuing of shares in a limited company
Business angels
Highly affluent individuals who provide financial capital to small start-ups or entrepreneurs in return for ownership equity in their businesses
Venture capital
Companies that invest in high-risk and high-potential start ups who then receive profit in return for their investment
Debt finance
Money that is borrowed from a financial institution to fund investments, which must be repaid as well as interest costs
Loan capital
Money sourced from financial institutions with interest charged on the loan to be repaid
Overdrafts
When a bank allows a firm to withdraw more money than it currently has in its account
Subsidies
Financial assistance granted by a government to support business enterprises that are deemed beneficial to society/ in the public interest
Grants
Funds provided by a government to businesses in a position to help the community, which do not need to be repaid
Trade credit
An agreement between businesses that allows for the buyer to pay the seller at a later date
Debt Factoring
A financial agreement where the debt fact takes on the responsibility for collecting the debt owed to the business and provides the business with a percentage of the owed debt
Leasing
A source of finance that allows a firm to use a fixed asset without having to permanently purchase it
Short-term finance
Money needed for the day-to-day costs (revenue expenditure) and solving cash flow issues that lasts for a year
Medium-term finance
Money used to finance capital expenditure/ purchase a fixed asset which lasts between 1 and 5 years
Long-term finance
Money used to purchase long-term fixed assets and equity finance which lasts between 5 to 30 years
