3.1 Sources of Finance Flashcards
Define personal funds
Finance from owner’s own pocket
A/DA of personal funds?
No interest
But risky
Define retained profits
The profit left after paying all deductions (such as corporation tax & dividends that is invested back into the business)
A/DA of retained profits
No interest
Takes time to build up
Defi of sale of assets
The compensated distribution of valuable property
A/DA of sale of asset
Easy turnover into cash, no need to sell shares
Makes a loss, will cost more when you try to buy it back
What are overdrafts?
When a bank agrees to a business borrowing up to an agreed limit as and when required
A/DA of overdrafts
Security, flexible
Interest, bank can change limit anytime they want
Defi of trade credit
Delaying of payment for goods/services, thereby allowing the business to obtain finance
A/DA of trade credit
Allows purchase of inventories
Loss of discounts, lack of trust & confidence from lenders
Defi of grants
Money given to small expanding businesses by larger agencies, often coming with requirements, that if met, does not have to be repaid
Defi of subsidies
Financial benefits given by the government to reduce costs & encourage increased production
A/DA of grants & subsidies
No need to repay back, adds prestige, no interest
Hard to get, strings attached
Defi of hire purchase
Asset sold to a company which agrees to make fixed repayments over an agreed period of time
A/DA of hire purchase
Immediate access to inventory, spread out costs
Interest, lack of security
Defi of leasing
Obtaining the use of equipment/vehicles by paying rental or leasing charges
A/DA of leasing
Spread out costs
Interest, expensive
Defi of debt factoring
The selling of claims over debtors to a debt factor in exchange for immediate liquidity, where only a portion of the value of the debts will be received in cash
A/DA of debt factoring
Fast payment, shortens cash cycle, no need to monitor debt collections
Loss of income
Defi of venture capital
Money provided by venture capital firms to companies that they deem have high growth potential
Defi of angel investors
Wealthy individuals who invest their own money into a company
A/DA of venture capital/angel investors
No debt, no interest
Lack of control, they can pull out anytime
Defi of share capital
The funds that a company raises in exchange for issuing an ownership interest in the company in exchange for shares
A/DA of share capital
No need for repayment, flexible
Loss of control, shared dividends
Defi of bank loans/loan capital
The extension of money from a bank to another party with the agreement that the money will be repaid, typically at interest
A/DA of loan capital
Fixed interest rates, flexibility
High interest rates, collateral
