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IGCSE Business Studies > 5.1 Business finance: needs and sources > Flashcards

5.1 Business finance: needs and sources Flashcards

1
Q

Name the sources of short-term finance.

A

Overdrafts
Trade credit
Factoring of debts

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2
Q

What are overdrafts?

A

when the bank allows you to spend more money than is in your account

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3
Q

Advantages + disadvantages of overdrafts

A

ads:
interest will be paid only on the amount overdrawn

disads:
interest rates are variable

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4
Q

What is trade credit?

A

A business delays payment to suppliers

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5
Q

Advantages + disadvantages of trade credit.

A

ads:
Almost an interest free loan

disads:
The supplier may refuse discounts

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6
Q

What is factoring of debts?

A

A specialist agent buys the claims on debtors (people who owe the business money) giving the business immediate cash

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7
Q

Advantages + disadvantages of

A

ads:
The collection of debt becomes the problem of the factor and not the business

disads:
The firm does not receive 100% of the value of its debts

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8
Q

Name the sources of long-term finance.

A

bank loans
hire purchase
leasing
issue of shares
long-term loans or debt finance
debentures

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9
Q

What are bank loans?

A

Loan that is payable to the bank over a fixed period of time

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10
Q

Advantages + disadvantages of bank loans

A

ads:
Quick to arrange

disads:
Security or collateral is usually required
Interest must be paid (Revenue -> working capital)

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11
Q

What is hire purchasing? How is it different to leasing?

A

Buying a fixed asset immediately but paying for it over a period of time with interest
Different to Leasing - the property belongs to the company after paying for the last payment

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12
Q

Advantages + disadvantages of hire purchase

A

ads:
The firm doesn’t need large sums of cash to purchase the asset

disads:
High interest payments

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13
Q

What is leasing? How is it different to hire purchase?

A

Using an asset without purchasing it, just paying a monthly sum to use it
Different to Hire Purchase - the company can never own the asset

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14
Q

Advantages + disadvantages of hire purchase.

A

ads:
The care and maintenance of the asset is carried out by the leasing company

disads:
Total cost of leasing is higher than purchase

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15
Q

What is issue of shares?

A

Equity finance for limited companies only (shares are part ownership of the business)

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16
Q

Advantages + disadvantages of issue of shares.

A

ads:
No interest has to be paid

disads:
Dividends will be expected (Dividend is a share of the profit made by the business)

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17
Q

What are long-term loans or debt finance?

A

Borrowing large sums of money that has to be paid over a long period of time

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18
Q

Advantages + disadvantages of long-term loans or debt finance.

A

ads:
Can be used to raise very long term finance, up to 25 years

disads:
Interest must be paid
(the longer the term of finance, the more interest you have to pay)

19
Q

What are debentures?

A

Long term loan certificates issued by limited companies

20
Q

Advantages + disadvantages of debentures.

A

ads:
Can be used to raise very long term finance, up to 25 years

disads:
Interest must be paid

21
Q

Name the internal sources of finance.

A

retained profit
sale of existing assets
sale of inventories to reduce inventory levels
owners retained savings

22
Q

What is retained profit?

A

the profit kept in the business after the owners and shareholders have taken their share

23
Q

Advantages + disadvantages of retained profit

A

ads:
Does not have to be repaid
No interest to pay

disads:
New business have no retained profits
Profits might be too low to finance the expansion
Keeping profits reduce payments to owners

24
Q

What is sale of existing assets?

A

items of value that are no longer required by business

25
Q

Advantages + disadvantages of sale of existing assets

A

ads:
Makes use of capital tied up
Does not increase debts

disads:
Take time to sell => amount not certain
Not available for new businesses

26
Q

What is sale of inventories to reduce inventory levels?

A

inventories can be sold to reduce levels

27
Q

Advantages + disadvantages of sale of inventories to reduce inventory levels

A

ads:
Reduce opportunity cost and storage cost

disads:
Done carefully to avoid not satisfying demand

28
Q

What are owners’ retained savings?

A

a sole trader or partnership member can put own savings into business

29
Q

Advantages + disadvantages of owners retained savings

A

ads:
Should be available to firm quickly
No interest paid

disads:
Savings may be too low
Increases risk taken by owners

30
Q

Name the external sources of finance.

A

issue of shares
bank loans
selling debentures
factoring debts
grants and subsidies
micro-finance

31
Q

What is issue of shares?

A

Shares can be issued by limited companies

32
Q

Advantages + disadvantages of issue of shares

A

ads:
No interest paid
Permanent source of capital => not repaid

disads:
Dividends expected by shareholders
Ownership of company could change

33
Q

What are bank loans?

A

Money borrowed from banks

34
Q

Advantages + disadvantages of bank loans

A

ads:
Quick to arrange
Large companies often offered low rates of interests

disads:
Bank loan repaid + interest

35
Q

What is selling debentures?

A

Long-term loan certificates issued by limited companies

36
Q

Advantages + disadvantages of selling debentures

A

ads:
Can be used to raise very long-term finance

disads:
Must be repaid with interest

37
Q

What is factoring debts?

A

Specialist agencies (debt factors) buy business debts - this gives the business immediate cash

38
Q

Advantages + disadvantages of factoring debts

A

ads:
Immediate cash is available to business
Risk of collecting debt becomes factors

disads:
Firm does not receive 100% of its value + debts

39
Q

What are grants and subsidies?

A

Outside agencies may lend the business money

40
Q

Advantages + disadvantages of grants and subsidies

A

ads:
Grants don’t have to be repaid

disads:
Often given with “strings attached”

41
Q

What is micro-finance?

A

the lending of small amounts of money at low interest to new businesses

42
Q

Advantages + disadvantages of micro-finance

A

ads:
Available to meet needs of poor people/ entrepreneur

disads:
Lending conditions are limited (potential high demand)

43
Q

What is finance?

A

a sum of money for use in a business, which is set aside for a particular reason.

44
Q

Why do businesses need finance?

A

Setting up the business
Running up the business on a day-to-day basis
Expanding the business.

IGCSE Business Studies (27 decks)

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