3.6.1 Flashcards
what are the different sources of finance?
-investors
-loans
-family and friends
what are the different ways of getting finance?
-retained profit
-selling assets
-bank loans or mortgages
-share issue
-government grant
-over draft
-trade credit
-hire purchase
what is retained profit?
part of a businesses annual profit which is kept within the business
advantages of retained profit
-no interest payments
-can be arranged immediately
-no need to repay money
disadvantages of retained profit
-only available to profitable businesses
-shareholders may ppose the decision
what is selling assets?
fixed assets, such as machinery or premises that the business owns, is sold
advantages of selling assets
-good if the asset is no longer of use to the business
-no interest payments
-may keep assets (leased back)
disadvantages of selling assets
-can take time
-may not be possible to find a buyer
-many businesses do not have suitable assets
what are bank loans or mortgages?
amount of money borrowed from a bank or other lender usually for a stated purpose
advantages of bank loans or mortgages
-repayment is spread overtime
-can be arranged quickly
-business knows amount to be paid in installments
disadvantages of bank loans or mortgages
-interest has to be paid
-banks may require an asset as collateral
what is share issue?
new shares are sold, raising money for the business
advantages of share issue
-no interest payments
-money does not have to be repaid
-a lot of finance can be raised from many investors
disadvantages of share issue
-owners may lose control of company
-only available to companies
-dividends may have to be paid on the shares to shareholders
what is a government grant?
sum of money given by the government
advantages of a government grant
-many government grants do not hae to be repaid
disadvantages of a government grant
-business may have to meet strict conditions to receive grant
-businesses may have to invest money alongside the grant
what is an overdraft?
arrangement with a bank that a business can spend more money that it has in its’ bank account
advantages of an overdraft
-meets short term cash flow problems
-businesses can continue trading in the short term
-interest is paid only on amount borrowed
disadvantages of an overdraft
-can be expensive
what is trade credit?
does not need to pay supplier for goods for a period of time
advantages of trade credit
-helps businesses with temporary cash flow problems
-periods of credit is usually interest free
disadvantages of trade credit
-goods must be paid for even if they do not sell
-interest is charged if the credit is not repaid within the time limit
what is a hire purchase?
businesses pay for assets, such as vehicles and paying in instalments over a period of time
advantages of a hire purchase
-spread the cost
disadvantages of a hire purchase
-can be very expensive
-business will not own the item until it’s completely paid
-business will not be able to raise large amounts of money from this source
what to consider when choosing an appropriate source of finance for a new business?
-amount of personal finance available
-legal structure of the business
-how risky the business is judged to be
what to consider when choosing an appropriate source of finance for an established business?
-profitability of business
-assets owned by the business
-past history + future prospects
-legal structure
-amount of finance needed
