3.2 Sources of Finance - External sources Flashcards
define external sources
money obtained from sources outside the business
define share capital
main source of finance for most limited liability companies. it’s money raised from selling shares in the company.
two A, two D - share capital
A
1. permanent source of finance
2. no interest payments
D
1. shareholders will expect to be payed dividends
2. for PuLC, the ownership may be diluted or change hands to new shareholders via stock exchange
define loan capital
money sourced from financial institutions, and it has interest charged on the loan
two A, two D - loan capital
A
1. accesible, can be repaid in a period of time or a in a lump sum
2. large organizations negotiate for lower interest rates
D
1. if the business is making a loss, the capital has to be redeemed
2. failure to repay the loan may lead to the seizure of a firm’s assets
define overdrafts
when a lending institution allows a firm to withdraw more money than it has in its account
two A, two D - overdrafts
A
1. opportunity for a firm to use more money than it has in its account
2. flexible form of finance
D
1. banks can request for the overdraft to be paid with very short notice
2. high interest rates
define trade credit
agreement between businesses that allows the buyer to pay the seller of good or services at a later date
define trade credit
agreement between businesses that allows the buyer to pay the seller of good or services at a later date
two A, two D - trade credit
A
1. business remains with a good cash flow because it doesn’t have to use its own cash immediately
2. interest-free means of raising funds for the length of the credit period
D
1. debtors lose out on the possibility of discounts they had purchased by paying with cash
2. paying at a delayed time may lead to poor relations between the seller and the buyer
define crowdfunding
when a business venture or project is funded by a large number of people each contributing a small amount of money
two A, two D - crowdfunding
A
1. access to thousands of investors, valuable form of marketing
2. the business receives feedback and has control
D
1. strong competition, they need to differentiate
2. difficulty with being accepted by the crowdfunding platform
3. fees need to be paid, risk of failure
define leasing
allows a firm to use an asset without purchasing it with cash
two A, two D - leasing
A
1. a firm doesn’t need high initial capital outlay to purchase the asset
2. the lessor looks for the asset
D
1. leasing can turn to be more expensive than the actual purchase due to the accumulated leasing charges
2. a leased asset cannot act as collateral for a business seeking a loan as an additional source of finance
define microfinance providers
institutions that provide banking services to low-income or unemployed individuals or groups who would otherwise have no other access to financial services
