3.2 - Sources of Finance Flashcards
what are sources of finance
means through which a business may obtain money
* internal and external sources of finance
what are internal sources of finance
and give examples
internal sources of finance are those which originate from inside of the business
- retained earnings
- retained assets
- sale of assets
what are external sources of finance
and give examples
external sources of finance are those that originate from outside of the business
- share capital
- loan capital
- overdrafts
- trade credit
- crowdfunding
- leasing
- crowdfunding
- business angel
personal funds definition
when owners invest their own money into the business
pros and cons of personal funds
pros
* will not owe anybody anything
* no loss of control
cons
* may not have any
* could potentially lose your own money
sale of assets definition
when a business sells its assets (resources - property and holdings) to retain finance
pros/cons of sale of assets
pros
* do not owe anybody
* one off payment
* no loss of control
cons
* may be future costs involved (eg. rent)
* may be time consuming
retained profit definition
using the money earned through sales back into the business as a source of finance (instead of paying it to shareholders)
pros/cons of retained profit
pros
* no loss of control
* no debt
* shows that the business is profitable
cons
* reduces the profits earned by the business
* shareholders may become upset that they recieve reduced dividends
* shareholders may share their sales
what external sources of finance fall under equity finance?
- share capital
- business angels
what external sources of finance fall under debt finance
- loan capital
- overdraft
- trade credit
- microfinance provider
what is debt financing?
the borrowing of money
what is equity finance
giving up a percentage of the company
what is share ownership
selling a share of the business to an investor in return for finance
(can only be done with limited liability companies - incorporated)
pros/cons of share capital
pros
* wont go into debt
* no interest payment
* (good in the short term - do not pay it back risk other people’s money)
cons
* giving away part of the business
* losing some control
business angel definition
a wealthy individual who invests large amounts of money into a business, for a significant ownership of the business, usually has more knowledge in the fiel
pros/cons business angel
pros
* can gain knowledge and insight
* no debt
cons
* give away control and part ownership of the business
* business angel may expect dividends and repayment
loan capital definition
borrowing of money from a certified financial institution - usually from a bank
pros/cons of loan capital
pros
* no loss of control of the business
* no sharing of profits
* temporary
* good for the long term - no control of business is lost
cons
* may be high interest rates
* has to be paid back
overdraft definition
an agreement with a bank that allowes an individual to go into their negatives for a certain amount of time
pros/cons overdraft
pros
* dont lost control of business
* very flexible - no need for extra formalities or legalities
cons
* may expect high interest rates
* has to be paid back
trade credit definition
when a buiness purchases an item but it able to pay for it at a later date
pros/cons of trade credit
pros
* no giving away of control
* temporarily good for cashflow
* no interest payment
cons
* there may be a discount for paying it on time - business may miss out
* has to be paid back
* only suitable for short-term purchases
microfinance provider definition
an individual or organisation that provides small loans - they may not be able to borrow from other institutions - eg. banks
