3a-Sources of finance Flashcards
Why do businesses need finance?
A:
Start-up Costs: To purchase equipment, rent premises, and hire employees.
Day-to-Day Expenses: To cover operational costs such as wages and bills.
Expansion: To invest in new locations, technology, or workforce growth.
Research & Development: To develop new products and improve existing ones.
Emergency Funds: To handle unexpected costs or downturns.
Q: What are internal and external sources of finance?
A:
Internal Finance: Money generated from within the business.
External Finance: Money obtained from outside the business.
Q: What are the main internal sources of finance?
Retained Profit
Retained Profit:
Profits reinvested into the business instead of being distributed to owners.
Advantages: No interest, no repayment.
Disadvantages: Not available for new businesses.
Q: What are the main internal sources of finance?
Owner’s Capital
Owner’s Capital:
Money invested by the business owner(s).
Advantages: No interest, shows commitment.
Disadvantages: Risk of losing personal assets.
Q: What are the main internal sources of finance?
Sale of Assets
Sale of Assets:
Selling unused equipment, land, or buildings.
Advantages: Immediate cash inflow.
Disadvantages: May weaken business operations.
Q: What are the main external sources of finance?
Bank Loan
Bank Loans:
Borrowing a fixed sum from a bank, repaid with interest.
Advantages: Structured repayments, suitable for long-term investment.
Disadvantages: Interest costs, risk of repossession of assets if not repaid.
Q: What are the main external sources of finance?
Overdraft
Overdrafts:
A facility allowing a business to spend more than what is in its bank account.
Advantages: Quick access to funds, flexible.
Disadvantages: High-interest rates, risk of account closure.
Q: What are the main external sources of finance?
Trade Credit
Trade Credit:
Suppliers allow businesses to buy now and pay later.
Advantages: Helps manage cash flow.
Disadvantages: Failure to pay on time damages supplier relationships.
Q: What are the main external sources of finance?
Leasing
Leasing:
Renting equipment instead of purchasing it.
Advantages: No large upfront cost, includes maintenance.
Disadvantages: Long-term costs may be higher.
Q: What are the main external sources of finance?
Hire Purchase
Hire Purchase:
Buying an asset and paying in instalments.
Advantages: Spreads cost over time.
Disadvantages: Interest increases overall cost.
Q: What are the main external sources of finance?
Venture Capital
Venture Capital:
Investment from venture capitalists in exchange for equity.
Advantages: Large funding, business expertise.
Disadvantages: Loss of some ownership and control.
Q: What are the main external sources of finance?
Gov grants
Government Grants:
Non-repayable funds provided by the government for specific purposes.
Advantages: No repayment or interest.
Disadvantages: Hard to qualify for, strict conditions.
Q: What factors influence the choice of finance?
4
Business Size & Type: Larger businesses can access more options.
Cost of Finance: Interest rates and repayment terms affect affordability.
Purpose of Finance: Short-term needs suit overdrafts, long-term needs suit loans.
Risk Level: Selling shares reduces risk, while loans increase debt risk.
