5.1 Business finance: needs and sources Flashcards
Name the sources of short-term finance.
Overdrafts
Trade credit
Factoring of debts
What are overdrafts?
when the bank allows you to spend more money than is in your account
Advantages + disadvantages of overdrafts
ads:
interest will be paid only on the amount overdrawn
disads:
interest rates are variable
What is trade credit?
A business delays payment to suppliers
Advantages + disadvantages of trade credit.
ads:
Almost an interest free loan
disads:
The supplier may refuse discounts
What is factoring of debts?
A specialist agent buys the claims on debtors (people who owe the business money) giving the business immediate cash
Advantages + disadvantages of
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
Name the sources of long-term finance.
bank loans
hire purchase
leasing
issue of shares
long-term loans or debt finance
debentures
What are bank loans?
Loan that is payable to the bank over a fixed period of time
Advantages + disadvantages of bank loans
ads:
Quick to arrange
disads:
Security or collateral is usually required
Interest must be paid (Revenue -> working capital)
What is hire purchasing? How is it different to leasing?
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
Advantages + disadvantages of hire purchase
ads:
The firm doesn’t need large sums of cash to purchase the asset
disads:
High interest payments
What is leasing? How is it different to hire purchase?
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
Advantages + disadvantages of hire purchase.
ads:
The care and maintenance of the asset is carried out by the leasing company
disads:
Total cost of leasing is higher than purchase
What is issue of shares?
Equity finance for limited companies only (shares are part ownership of the business)
Advantages + disadvantages of issue of shares.
ads:
No interest has to be paid
disads:
Dividends will be expected (Dividend is a share of the profit made by the business)
What are long-term loans or debt finance?
Borrowing large sums of money that has to be paid over a long period of time
Advantages + disadvantages of long-term loans or debt finance.
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)
What are debentures?
Long term loan certificates issued by limited companies
Advantages + disadvantages of debentures.
ads:
Can be used to raise very long term finance, up to 25 years
disads:
Interest must be paid
Name the internal sources of finance.
retained profit
sale of existing assets
sale of inventories to reduce inventory levels
owners retained savings
What is retained profit?
the profit kept in the business after the owners and shareholders have taken their share
Advantages + disadvantages of retained profit
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
What is sale of existing assets?
items of value that are no longer required by business
Advantages + disadvantages of sale of existing assets
ads:
Makes use of capital tied up
Does not increase debts
disads:
Take time to sell => amount not certain
Not available for new businesses
What is sale of inventories to reduce inventory levels?
inventories can be sold to reduce levels
Advantages + disadvantages of sale of inventories to reduce inventory levels
ads:
Reduce opportunity cost and storage cost
disads:
Done carefully to avoid not satisfying demand
What are owners’ retained savings?
a sole trader or partnership member can put own savings into business
Advantages + disadvantages of owners retained savings
ads:
Should be available to firm quickly
No interest paid
disads:
Savings may be too low
Increases risk taken by owners
Name the external sources of finance.
issue of shares
bank loans
selling debentures
factoring debts
grants and subsidies
micro-finance
What is issue of shares?
Shares can be issued by limited companies
Advantages + disadvantages of issue of shares
ads:
No interest paid
Permanent source of capital => not repaid
disads:
Dividends expected by shareholders
Ownership of company could change
What are bank loans?
Money borrowed from banks
Advantages + disadvantages of bank loans
ads:
Quick to arrange
Large companies often offered low rates of interests
disads:
Bank loan repaid + interest
What is selling debentures?
Long-term loan certificates issued by limited companies
Advantages + disadvantages of selling debentures
ads:
Can be used to raise very long-term finance
disads:
Must be repaid with interest
What is factoring debts?
Specialist agencies (debt factors) buy business debts - this gives the business immediate cash
Advantages + disadvantages of factoring debts
ads:
Immediate cash is available to business
Risk of collecting debt becomes factors
disads:
Firm does not receive 100% of its value + debts
What are grants and subsidies?
Outside agencies may lend the business money
Advantages + disadvantages of grants and subsidies
ads:
Grants don’t have to be repaid
disads:
Often given with “strings attached”
What is micro-finance?
the lending of small amounts of money at low interest to new businesses
Advantages + disadvantages of micro-finance
ads:
Available to meet needs of poor people/ entrepreneur
disads:
Lending conditions are limited (potential high demand)
What is finance?
a sum of money for use in a business, which is set aside for a particular reason.
Why do businesses need finance?
Setting up the business
Running up the business on a day-to-day basis
Expanding the business.
