6 - Sources of finance Flashcards
What is meant by short term finance
Up to 3 years
What is meant by medium term finance
3-10 years
What is meant by long term finance
10+ years
What are some sources of finance
Divestment Sale of fixed assets Retained profits Factoring Sale/lease back Personal savings
What is divestment
Stopping investment into an area of the business
Advantages of divestment
Focus on fewer areas
Specialisation
Disadvantages of divestment
Less diversification
Redundancies
What is sale of fixed assets
Selling capital assets to obtain finance
Advantage of sale of fixed assets
Large source
Disadvantages of selling fixed assets
Time consuming
Costs
What is retained profit
Investing profits from previous years back in to the firm
Advantages of retained profit
Easy to obtain
No cost
Disadvantages of retained profit
Can’t pay high dividends
Opportunity costs
What is factoring
Selling debts to debt collectors
Advantages of factoring
Quick
Get rid of long term issues
Disadvantages of factoring
Expensive
What is sale and leaseback
Selling your own property then leasing it back
Advantages of sale and leaseback
No longer responsible for upkeep
High finance
Disadvantages of sale and leaseback
Long term costs in rent
No longer own asset
Subject to their t’s and c’s
What is personal savings
Where the owner invests their own money into the firm
Advantages of personal saving investment
Easily obtainable
Cheap
Disadvantages of personal savings investment
Likely opportunity cost to owner
High personal risk for owner
What are some examples of external sources of finance
Overdraft Trade credit Leasing Hire purchase Bank loan Grant Share issue Mortgage Venture capital Debenture
What is an overdraft
What the bank let you spend more than what is in your account
Advantages of an overdraft
- cheap
- easily obtainable
Disadvantages of overdraft
Expensive and not suitable if long term
Business may overspend
What is trade credit
Suppliers allow you to buy goods now but pay later for goods
Advantages of trade credit
Improves cash flow
Builds trust and respect
Disadvantages of trade credit
Lose supplier if not honoured
Less likely EOS
What is leasing
A legal agreement where you pay monthly for the use of something
Advantages of leasing
Not responsible for upkeep
No high initial cost
Disadvantages of leasing
Don’t own asset so restricted
Poor upkeep
What is hirepurchase
Paying for something in monthly instalments after a deposit
Advantages of hire purchase
Good for cash flow
Disadvantages of hire purchase
Don’t own it until paid off
Long term
What is a bank loan
When a bank lends you money, that over a fixed period has to be paid back with a rate of interest
Advantages of bank loan
Large amount
Improve credit score
Disadvantages of bank loan
Interest costs
Poor credit score if not paid back
What is a grant
Sum of money given by government for specific purposes
Advantages of grant
No costs
Large amount, helps startups
Disadvantages of grants
Specific reason
Restrictions
What is share issue
A firm offers for sale new shares
Advantages of share issue
Obtain large amount
Good publicity
Easy on stock exchange
Disadvantages of share issue
Difficult and costly process
Increase pressure
What is a mortgage
Bank or building society lends money at interest for purchase of a property
Advantages of mortgage
Pay in instalments
Improve credit score
Disadvantages of mortgage
Possibility of bankruptcy
Pay interest
What is venture capital
Another firm invests into your business
Advantages of venture capital
Large amount
Gain expertise
Disadvantages of venture capital
Loss of control
Pressure
What is a debenture
Borrowing money/loan from the public at a fixed rate of interest
Factors considered when deciding on finance
Amount required Reasons for it Time scale Type of business Security State of economy
