5.2 Sources of Finance Flashcards
Why is an overdraft a short term source of finance?
Due to the high daily interest charges.
Is interest usually charged when trade credit is given?
No
Define retained profit.
Profit made by the business but kept back for its own use. Not paid to owners/shareholders.
Which source of finance are sole traders and partnerships not able to use?
Share issue.
Define interest.
An amount of money that must be paid back in addition to the amount borrowed.
Describe the difference between internal and external finance.
Internal comes from within the business, whereas external comes from outside of the business.
True or false - Sale of assets has no disadvantages.
False - if demand increases the assets may have to be bought again at full price.
List two advantages of internal finance.
Normally no cost to the business. Quick to organise.
Define security.
Something of value which is offered to the lender as a form of guarantee of payment.
Does a grant have to be repaid?
No, not usually.
State 3 reasons why businesses need finance.
Start up. Growth/expansion. Day-to-day running costs. Buy new equipment. develop and fund marketing campaigns.
True or false - a mortgage is a short term source of finance .
False - mortgages are usually for 25-30 years.
What is trade credit used to buy?
Stocks, materials.
True or false - banks may be reluctant to give a loan to a business with a poor financial record.
True
List two disadvantages of external finance.
There is normally a cost, such as interest. Security may be required.
Control may be lost.
State three methods of external finance
Loan Overdraft Trade credit Share issue Crowdfunding New partner
What is an overdraft?
An agreement with the bank that a business can spend more money than it has in its account.
What is trade credit?
When a business buys stock from a supplier but is given 30, 60 or 90 days to pay.
Define owners’ capital.
Money from the owners personal savings invested into the business.
What is meant by ‘taking on a new partner’?
Adding a new partner into the business who brings capital as well as skill and expertise.
Define share issue.
Raising money from investors by selling new shares.
Define crowdfunding.
Money raised through an appeal to the public.
Which source of finance is not available to limited companies?
Taking on a new partner.
State two advantages of using owners’ capital.
No need to repay.
No interest to be paid.
State one disadvantage of using owners’ capital.
None left for the owner in case of emergency.
Might not be enough.
State two advantages of using retained profit.
No interest to be paid.
No need to repay.
State one disadvantage of using retained profit.
Only available to businesses that have made a profit.
It may not be enough.
State two advantages of using sale of assets.
No repayment.
No interest.
State two disadvantages of using sale of assets.
Can take time to sell the asset.
May not be possible to find a buyer.
If demand increases the asset may need to be bought again at full cost.
State two advantages of an overdraft.
Meets short term cash flow problems.
Business can continue trading short term.
Only charged interest on the amount used.
State one disadvantage of an overdraft.
High interest can be expensive.
State two advantages of a trade credit.
Goods can be sold before payment for them is made.
Helps with short term cash flow problems.
Usually interest free.
State two disadvantages of a trade credit.
The goods must be paid for, even if they do not sell.
Interest may be charged if the credit is not repaid within the agreed time limit.
State two advantages of taking on a new partner.
May bring skills to the business.
No cost or repayment.
State two disadvantages of taking on a new partner.
The new partner will have a running in the say of the business.
Profits must be shared with the new partner.
State two advantages of using a loan.
Repayment is spread over time.
Fixed repayments helps with budgeting.
State two disadvantages of using a loan.
Interest to be paid.
May need to risk an asset as security.
State two advantages of share issue.
A lot of finance can be raised.
Money does not have to be paid back.
No interest payable.
State two disadvantages of share issue.
Dividends have to be paid.
Shareholders entitled to a say in the running of the business through votes at the AGM.
The business may be taken over.
State two advantages of crowdfunding.
A lot of money can be raised.
Good for start-up or expansion.
No security is needed.
State two disadvantages of crowdfunding.
Interest may need to be paid if it is loaned rather than donated.
Profits may need to be shared if equities are sold (part ownership).
What is crowdfunding?
Money raised from sponsors who can either donate, lend or become part-owner.
Define loan
A sum of money borrowed for a certain period of time at an agreed rate of interest.
