3.5.3- Making financial decisions: sources of finance Flashcards
3.5 Financial management
What is the internal sources of finance?
Retained profit
What are the external sources of finance?
- Overdrafts
- Debt factoring
- Share capital
- Loans
- Venture capital
- Crowdfunding
What are the short term sources of finance?
- Overdrafts
- Debt factoring
- Crowdfunding
- Retained profit
What are long-term sources of finance?
- Share capital
- Loans
- Venture capital
- Retained profit
What must businesses consider when choosing a source of finance?
- The legal structure of a business
- The amount of money required
- The level of risk involved
- If short-term or long-term finance is needed
What is retained profit?
- Profit saved and built up over years, then reinvested into the business
What is a strength of retained profit?
The business doesnt have to pay any interest on the money
What is a weakness of retained profit?
Shareholders may object as they would wish to recieve dividends
What is an overdraft?
Where banks let a business have a negative amount of money in its bank account.
What is a strenght of an overdraft?
They’re easy to arrange and flexible. Businesses can can borrow a little or big amount and only pay interest on the amount they use.
What is a weakness of overdraft?
Banks usually chare high rates of interests, can be unsuitable in the long-term
What is debt factoring?
Where banks and other financial institutions take unpaid invoices off businesses hands and give them instant cahs payment.
What is a strength debt facotoring?
Businesses can instantly get the omney they’re owed
What is a weakness of debt factoring?
The debt factoring company keeps some of the money as a fee.
What is a bank loan?
Businesses borrowing a fixed amount of money ands pay it back over a fixed period of time with interest.
What is a strength of bank loans?
- Your guaranteed money
- The bank wont own any amount of the business
- Interest is usally lower than an overdraft
What is share capital?
Money raised by selling shares
What is a weakness of bank loans?
- Can be diffiuclt to arrange, banks are cautious when giving loans
- Keeping up with repayments can be difficult
- The business may have to pay a charge if they decide to pay the loan back early
What is a strength of share capital?
The money doesnt have to be repaid and new shareholders can bring additional expertise
What is a weakness of share capital?
By selling shares, the origional no longer owns all the busienss, may have to pay the shareholders a dividend
What is venture capital?
Professionals funding in the form of a share or loan that is invested in a business thought to be at high risk.
What is a strength of venture capital?
The business can recisve experitse from professionals
What is a weakness of venture capital?
The investor has a chance to overtake
What is crowdfunding?
A method of financing a business using contributions from people online
What is a strength of crowdfunding?
Has a lower risk of obtaining finances, compared to other options
What is a weakness of crowdfunding?
Crowdfunding organisations take a small portion of the finance rasied
