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Unit 3: Finance and Accounts (BM IB) > 3.2 Sources of finance > Flashcards

3.2 Sources of finance Flashcards

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1
Q

Internal sources of finance

A
  1. Personal funds
  2. Retained profit
  3. Sale of assets
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2
Q

Personal funds

A

source of finance for sole traders that comes mostly from their own personal savings

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2
Q

Advantages of personal funds

A
  1. sole traders know exactly how much money is available to run the business
  2. provides more control over finances
  3. not required to pay back
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3
Q

Disadvantages of personal funds

A
  1. risk to the sole trader in investing life savings
  2. might not be sufficient to maintain a business
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4
Q

Retained profit

A

profit that remains after a business has paid out dividends to its shareholders

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5
Q

Advantages of retained profit

A
  1. cheap, doesnt incur interest charges
  2. permanent source of finance
  3. flexible in how it can be used
  4. control over it without interference
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6
Q

Disadvantages of retained profit

A
  1. start-ups will not have any
  2. if it is too low it might not be sufficient
  3. if its too high it means that too little was paid to shareholders which affects the business’ image
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7
Q

Sale of assets

A

when a business sales off its unwanted or unused assets to raise funds

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8
Q

Disadvantages of sale of assets

A
  1. only available for established businesses, new businesses may lack assets to sell
  2. time-consuming to find a buyer, especially if its an obsolete asset
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8
Q

Advantages of sale of assets

A
  1. good way of raising capital with not used assets
  2. no interests incurred
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9
Q

External sources of finance

A
  1. Share capital
  2. Loan capital
  3. Overdrafts
  4. Trade credit
  5. Crowdfunding
  6. Leasing
  7. Microfinance providers
  8. Business angels
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10
Q

Share capital

A

money reaised from the sale of shares of a limited company

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11
Q

Advantages of share capital

A
  1. permanent source of capital
  2. no interest payments
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12
Q

Disadvantages of share capital

A
  1. shareholders expect to be paid dividends when the business makes profit
  2. for public limited companies, the ownership of the company may be diluted or change hands from the original shareholders to new ones via the stock exchange
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13
Q

Loan capital

A

money sourced from financial institutions such as banks, with interest charged on the loan to be repaid

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14
Q

Advantages of loan capital

A
  1. accessible and quick to arrange
  2. repayment is spread out over a predetermined period of time, reducing the burden
  3. large organizations can negotiate for lower interest charges
  4. owners still have full control of the business if no shares are issued to dilute their ownership
15
Q

Disadvantages of loan capital

A
  1. capital will have to be redeemed even if the business is making a loss
  2. collateral (security) might be required before any funds are lent
  3. failure to repay the loan may lead to the seizure of a firms asset
  4. if variable interest rates increase, firms are faced with a high debt repayment burden
16
Q

Overdrafts

A

when a lending institution allows a firm to withdraw more money than it currently has in its account

17
Q

Advantages of overdrafts

A
  1. provides an opportunity for firms to spend more money than they have in their account
  2. helps in settling short term debts
  3. flexible
  4. charging interest only on the amount overdrawn can make it a cheaper option than loan capital
18
Q

Disadvantages of overdrafts

A
  1. banks can request for the overdraft to be paid back at very short notice
  2. due to the variable nature of an overdraft, the bank can at times charge high interest rates
19
Q

Trade credit

A

an agreement between businesses that allows the buyer of goods or services to pay the seller at a later date

20
Q

Advantages of trade credit

A
  1. by delaying payments to suppliers, business are left in a better cash flow position than if they paid cash immediately
  2. interest-free
21
Q

Disadvantages of trade credit

A
  1. debtors lose out on the possibility of getting discounts
  2. delaying payment leads to poor relations
  3. latter could refuse to engage in future transactions with the firm
22
Q

Crowdfunding

A

when a business venture or project is funded by a large number of people each contributing a small amount of money

23
Q

Advantages of crowdfunding

A
  1. provides access to thousands of investors who can see, interact and share
  2. valuable form of marketing, media attraction
  3. opportunity for feedback and expert guidance
  4. full control when raising funds
  5. it can decide how to structure the campaign
  6. good alternative for businesses struggling to get bank loans or traditional funding
24
Q

Disadvantages of crowdfunding

A
  1. strong competition from other businesses seeking crowdfunding
  2. subject to rejection
  3. fees need to be paid to crowdfunding platforms (percentage of contributions)
  4. potential risk of failure
25
Q

Leasing

A

a source of finance that allows a firm to use an asset without having to purchase it with cash

26
Q

Advantages of leasing

A
  1. doesnt need a high initial capital to purchase the asset
  2. lessor takes on the responsibility of repair and maintenance of the asset
  3. useful when an asset is only required for short periods of time
27
Q

Disadvantages of leasing

A
  1. can be more expensive than the purchase due to accumulated total costs
  2. leased asset cannot act as collateral for a business seeking a lloaon as an additional source of finance
28
Q

Microfinance providers

A

institutions that provide banking services to low-income or unemployed individuals or groups who would otherwise have no other access to financial services

29
Q

Advantages of microfinance

A
  1. most microfinance institutions dont seek any collateral
  2. provide or disburse loans quickly and with less formalities
  3. extensive portfolio of loans (working capital, housing, etc)
  4. promote self sufficiency and entrepreneurship
30
Q

Disadvantages of microfinance

A
  1. can adopt harsh recovery methods if the customer does not have legal representation
  2. offer smaller loan amounts of financial capital than other financial institutions
  3. interest rates are high, they find it difficult to offer lower rates
31
Q

Business angels

A

highly affluent individuals who provide financial capital to small start-ups or entrepreneurs in return for ownership equity in their businesses

32
Q

Advantages of business angels

A
  1. more open to negotiation than other institutions or lenders to small/start up businesses
  2. no repayment required
  3. offer valuable knowledge, focusing on helping the business succeed
33
Q

Disadvantages of business angels

A
  1. may assume a large degree of control or ownership in the business
  2. may expect a substantial return on their investment within the first few years, sometimes 10 times the original investment
34
Q

Short-term finance

A

money needed for the day-to-day running of a business and therefore provides the required working capital, examples include bank overdrafts, short-term loans and trade credit

35
Q

Long-term finance

A

funding obtained for the purpose of purchasing long-term fixed assets or other expansion requirements of a business, used for its overall improvement. examples include long-term bank loans and share capital

36
Q

Factors influencing the choice of a source

A
  1. purpose or use of funds
  2. cost
  3. status and size
  4. amount required
  5. flexibility
  6. state of the external environment
  7. gearing

Unit 3: Finance and Accounts (BM IB) (4 decks)

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