3.5.3 making financial decisions sources of finance Flashcards
What are sources of finance
where a business gets money from to fund their business activities
either internally or externally
What are sources of finance
retained profits
net current assets
sale of assets
debt factoring
owners capital
mortgages
overdrafts
loans
venture capital
leasing
trade and credit
hire purchase
grants
donations
crowdfunding
share capital`
Why do businesses need finance
business set up
day-to-day trading
growth and development
Key considerations in choosing the right sources of finance
how much?
-enough v not too much
-safety buffer
how long?
-long term
-short term
when?
-all at once
-drip feed/ as needed
type of business?
-sole trader
-limited company
challanges
-keeping control
-additional costs
What are Long-term source of finance
finances the whole business over many years
What are examples of short-term finance
bank overdraft
factoring (debt factoring)
What are short term sources of finance
finances day-to-day trading of the business
What are examples of long-term finance
share capital
retained profits
venture capital
bank loans
crowdfunding
What is crowdfunding
(long term)
a method of raising finance by asking a large number of people each for a small amount of money, often via the internet
-usually in exchange for particular perks such as products, discounts with the firm
-used successfully by computer game firms and bands to make albums
What is venture capital
prefer to invest in entrepreneurial businesses
interested in aspirations and potential for growth rather than by current size
Unless a business can offer the prospect of significant turnover growth within 5 years it is unlikely to be of intrest to a venture capital firm
Advantages of retained profit
no interest charges
available immediately
no loss of control
only available when business has accumulated the money
Disadvantages of retained profit
amount may be limited
reduces payments to shareholders- could lead to dissatisfaction
Advantage of debt factoring
speeds up the flow of cash into the business from debts
the factor company takes on the risk of bad debt
Disadvantage of debt factoring
only receive percentage of amount owed- reducing profits
can give wrong impression or alienate customers
Advantages of bank overdraft
relatively easy to arrange
flexible- use as cash flow requires
interest-only paid on the amount borrowed under the facility
not secured on assets of business
