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Business > 3.2 Sources Of Finance > Flashcards

3.2 Sources Of Finance Flashcards

1
Q

What are the two main sources of finance for a business?

A

Internal and external sources of finance

Internal sources are generated within the organization, while external sources come from outside.

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2
Q

What is an example of internal sources of finance?

A

Personal funds, retained profits, sale of assets

These funds are generated from within the organization.

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3
Q

What are personal funds in the context of internal finance?

A

The use of an entrepreneur’s own savings

This is usually a main source of finance for sole traders.

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4
Q

What is retained profit?

A

The value of surplus kept within the business after paying corporate taxes and dividends

Often used for capital expenditure by purchasing or upgrading fixed assets.

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5
Q

How does retained profit benefit a business?

A

It does not incur interest charges

This makes it a cost-effective source of finance.

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6
Q

What does the sale of assets refer to?

A

Selling existing valuable items owned by the business

This can include dormant or obsolete assets.

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7
Q

What are external sources of finance?

A

Funds from outside the organization, such as debt or share capital

This includes loans and investments from shareholders.

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8
Q

Define share capital.

A

Money raised from selling shares in a limited liability company

It can be raised through initial public offerings (IPOs) or subsequent share issues.

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9
Q

What is the main source of finance for limited liability companies?

A

Share capital

It is recorded in the company’s balance sheet.

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10
Q

True or False: Internal finance is often free of interest or charges.

A

True

This makes it an attractive option for businesses.

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11
Q

Fill in the blank: The sale of assets can include selling _______ assets.

A

obsolete

Outdated assets that are no longer useful.

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12
Q

What is a potential issue with internal finance?

A

It may not be sufficient to meet the needs of the business

This can limit growth and expansion opportunities.

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13
Q

What are the two types of share capital?

A

Publicly held and privately held

Publicly held companies can sell shares on the stock exchange.

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14
Q

What is the significance of an Initial Public Offering (IPO)?

A

It allows a company to raise capital by selling shares for the first time

IPOs can be heavily oversubscribed, pushing up share prices.

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15
Q

What does IPO stand for in the context of business?

A

Initial Public Offering

An IPO is when a business converts legal states to a publicly traded company by selling shares on a stock exchange for the first time.

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16
Q

What is a Share Issue/Placement?

A

An existing publicly held company raises further finance by selling more of its shares.

This process allows companies to increase capital by issuing additional shares.

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17
Q

What is Loan Capital?

A

A medium-to-long term source of interest-bearing finance obtained from commercial lenders.

Common forms include mortgages, business development loans, and debentures.

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18
Q

What are Mortgages?

A

Secured loans for the purchase of real estate.

If the borrower fails to repay, the lender can reclaim the property.

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19
Q

What are Business Development Loans used for?

A

Catered to meet specific needs of the borrower to develop aspects of the business.

These loans are highly flexible and can be used for a range of purposes including starting a business or purchasing equipment.

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20
Q

What are Debentures?

A

Long-term loans issued by a business.

Debenture holders receive interest payments even if the business incurs a loss.

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21
Q

What is a disadvantage of issuing debentures?

A

Increases the firm’s gearing ratio, making it more vulnerable to risk.

A higher gearing ratio means the firm has more borrowing compared to its capital employed.

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22
Q

What are Overdrafts?

A

Allow a business to spend in excess of the amount in its bank account, up to a predetermined limit.

Overdrafts are the most flexible form of short-term borrowing for businesses.

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23
Q

When are overdrafts particularly useful?

A

When there is a need for large cash flow.

Examples include retailers stocking up for peak season trading or businesses awaiting payments from customers.

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24
Q

What is a disadvantage of overdrafts?

A

Repayable on demand from the lender and can have high interest rates.

Overdrafts can only cover smaller amounts of money.

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25
Q

What are the advantages of overdrafts?

A

Provide flexibility for businesses facing occasional cash flow problems.

They are usually more effective than bank loans for short-term needs.

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26
Q

What is the definition of trade credit?

A

Allows a business to postpone payment for goods or services, typically between 30-60 days.

Credit providers do not receive cash until a later date.

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27
Q

Who are the creditors in trade credit?

A

Organizations that offer trade credit.

Customers who receive trade credit are known as debtors.

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28
Q

What is one advantage of trade credit?

A

Helps to ease a firm’s cash flow problems.

This allows businesses to manage their finances more effectively.

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29
Q

What is the main difference between credit cards and trade credit?

A

Credit cards are provided by financial institutions, while trade credit is provided by suppliers.

Credit cards act as cash advances to the holder.

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30
Q

What is crowdfunding?

A

The practice of raising finance for business ventures by getting small amounts of money from a large number of people, usually online.

It relies on social media platforms.

31
Q

What is a disadvantage of crowdfunding?

A

Heavily regulated to protect donors and prevent fraudulent activities.

It can lead to loss of ownership control as investors may demand shares in the new company.

32
Q

What is leasing?

A

A form of hiring where a lessee pays rental income to lease assets from the legal owner.

The lessee does not own the asset but has the right to use it.

33
Q

What is one advantage of leasing?

A

Releases cash for other purposes within the business.

Repairs and maintenance are typically the responsibility of the lessor.

34
Q

What is a disadvantage of long-term leasing?

A

More expensive than hire purchase or outright purchase of assets.

This can impact long-term financial planning.

35
Q

What does sale-and-leaseback involve?

A

A business sells a fixed asset and then leases it back.

Ownership is transferred, but the asset remains in use by the business.

36
Q

What is hire purchase?

A

A form of buying on credit where the asset is legally owned by the creditor until all payments are made.

A deposit is required to secure the hire purchase deal.

37
Q

Fill in the blank: In hire purchase, if the buyer defaults on the agreement, the lender can _______.

A

repossess the asset.

38
Q

How does hire purchase differ from leasing?

A

In hire purchase, the buyer eventually owns the asset after the last installment is paid.

Leasing does not transfer ownership.

39
Q

What is the definition of microfinance providers?

A

Type of financial service aimed at entrepreneurs of small businesses, especially females on low incomes

Microfinance providers assist disadvantaged members of society in gaining access to essential financial services.

40
Q

What is the primary goal of microfinance providers?

A

To help eradicate poverty by enabling access to financial services for small businesses

Microfinance providers operate as social enterprises.

41
Q

What is a significant disadvantage of microfinance providers?

A

Immorality - They are for-profit organizations that profit from the poor

Critics argue that microfinance is an unethical operation.

42
Q

How do microfinance providers contribute to job creation?

A

Effective use of microfinance can help create new job opportunities

This has beneficial effects on society as a whole.

43
Q

What is a limitation of funding provided by microfinance providers?

A

Limited finance - They only offer small amounts due to the high risk of default

This limits the potential for larger business expansion.

44
Q

What is a potential benefit of receiving microfinance?

A

Successful applicants are less likely to pull their children out of school

This contributes to social wellbeing and better access to healthcare.

45
Q

Who are business angels?

A

Extremely wealthy individuals who invest their own money in small to medium-sized businesses with high growth potential

They provide funding for firms unable to secure finance from commercial banks.

46
Q

What is a disadvantage of working with business angels?

A

Owner loses some control of the business

The organization has to give up a stake owned by the business angel.

47
Q

What criteria do business angels consider before investing?

A
  • Return on Investment
  • Business plan
  • Creative and original ideas
  • People (team quality)
  • Track Record (previous management history)

They assess these factors to ensure the potential for profitability.

48
Q

Fill in the blank: Microfinance providers help those in poverty to become _______.

A

financially independent

49
Q

True or False: Microfinance providers typically lend large amounts of money to businesses.

A

False

They typically lend small amounts, focusing on high-risk borrowers.

50
Q

What is the main challenge for microfinance providers concerning borrower eligibility?

A

Limited eligibility - Not all poor individuals qualify for microfinance

Providers minimize risks by ensuring borrowers can repay loans.

51
Q

What are some forms of funding for businesses?

A
  • Sole traders
  • Partnerships
  • Private limited company
  • Public limited company
  • Non-profit organization
  • Business angels
  • Crowdfunding
  • Donations/gifts
  • Leasing
  • Loan capital
  • Microfinance providers
  • Overdrafts
  • Personal funds
  • Retained profit (surplus)
  • Sale of assets
  • Share capital
  • Trade credit

These are various sources of funding available to businesses.

52
Q

What is the primary focus of a good manager regarding cash flow?

A

Ensuring cash going in is greater than cash going out

This is essential to maintain the liquidity of the business.

53
Q

What are short-term sources of finance?

A

Available for a period of less than 1 year, used for daily operations

Examples include overdrafts and trade credit.

54
Q

Define long-term sources of finance.

A

Available for any period of more than 12 months, used for purchasing fixed assets or financing expansion

This includes loans and debentures.

55
Q

List two internal sources of finance.

A
  • Personal funds
  • Retained profits

Internal sources are funds generated within the business.

56
Q

List two external sources of finance.

A
  • Business angels
  • Crowdfunding

External sources are funds raised from outside the business.

57
Q

How does the size of a firm affect its ability to raise finance?

A

Larger firms can raise finance from a wider range of sources and at cheaper rates

They can offer higher levels of collateral.

58
Q

What is the purpose of finance in a business context?

A

Determines whether funds are needed for daily operations (short-term) or replacement of fixed assets (long-term)

This impacts the choice of finance sources.

59
Q

What is a high gearing ratio, and what does it indicate?

A

A high gearing ratio indicates high risk due to significant debt commitments

Firms with high gearing are more vulnerable as interest rates increase.

60
Q

What factors do lenders consider when assessing a firm’s financial health?

A

Existing gearing ratio and overall capital employed

This helps determine the firm’s risk level.

61
Q

What are some external factors that can impact a business’s financial situation?

A
  • State of the economy
  • Consumer confidence levels
  • Interest rates
  • Stock market volatility

These factors can affect borrowing costs and investment decisions.

62
Q

True or False: Larger businesses always have higher debt commitments than smaller businesses.

A

False

While larger businesses can raise more finance, they may not necessarily have higher debt commitments.

63
Q

Fill in the blank: If a small amount of finance is needed, _______ or overdraft is better.

A

retained profit

These options are typically more accessible for smaller financing needs.

64
Q

What are the costs associated with financing that managers need to consider?

A
  • Higher costs for long-term purchases
  • Administrative fees
  • Maintenance charges

Understanding these costs is crucial for effective financial management.

65
Q

What is the duration of finance typically referred to in business?

A

It refers to how long finance is needed.

66
Q

What does funding capital expenditure typically involve?

A

Purchase of new factory production facility.

67
Q

What type of loans are usually associated with capital expenditure?

A

Long term loans.

68
Q

What is the purpose of finding working capital?

A

For day-to-day running of the business.

69
Q

What type of savings are associated with working capital?

A

Short term savings of finance.

70
Q

Disadvantage internal

A

Significant opportunity cost ivolved in using internal finance.

Internal finance may not be enough to meet the needs of business

71
Q

Advanatage of internal

A

Often free, there isn’t any intrest ees.

Doesn’t involve 3rd parties who may want to influence business decisions.

72
Q

List all internal source of fiannce

A

-perosnal funds
-retained profits
-sale of assets

73
Q

List all external sources of finance

A
  • Business angels
  • crowdfunding
  • leasing
  • loan capital
  • microfinance providers
  • overdrafts
  • share capital
  • trade credit.

Business (12 decks)

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