6.1 Sources Of Finance Flashcards
What are sources of finance?
A means of raising funds that are needed by a
business for purposes such as expansion
What are internal sources of finance?
Money that is available within the business, for example retained profits from previous years
What are external sources of finance?
Refers to money that comes from outside the business,for example, a loan from a bank
What is an asset?
Something that is owned by a business, such as land, buildings, vehicles and machinery
What are examples of internal sources of finance?
- Retained profits
- Selling unwanted assets
- Trade credit
What are retained profits?
The part of the business’s annual profits which is kept within the business to finance future investments
What is Trade credit?
A period of time which suppliers allow customers before payment for supplies must be made
What are the benefits of trade credit?
- A ‘free’ source of finance
What are the drawbacks of trade credit?
Usually only available for up to 90 days
What are the benefits of selling assets?
- Money may be available quickly
- Avoids interest charges
What are the drawbacks of selling assets?
- Assets not available to business in the future
- Sale and leaseback requires future payments to use the asset
What are the benefits of retained profits?
- Avoids paying interest on a loan
What are the disadvantages of retained profits?
- Only available to profitable businesses
- Owners receive less of the profits
What is a share issue?
When a company sells additional shares in the business to raise finance
What is a loan?
An amount of money provided to a business for a stated purpose in return for regular repayments, including interest charges. Usually lent over a short period of time, for example 5 years.
What is a mortgage?
A loan from a bank or building society that is used to buy land and buildings such as an office or shop. Usually lent over a long period of time, for example 25 years
What is an overdraft?
A flexible loan which businesses can use, whenever necessary, up to an agreed limit
What is a hire purchase?
A source of finance under which businesses pay for assets by making an initial payment and then paying instalments over time
What is a government grant?
A sum of money given to an entrepreneur or business by the government for a specific purpose
What are external sources of finance?
- Loans from family and friends
- New share issue
- Loan
- Mortgage
- Overdraft
- Hire purchase
- Government grants
What are the benefits of loans from family and friends?
- Can be quick and easy to arrange
- There may be no interest payments
What are the drawbacks of loans from family and friends?
- Family and friends may have limited financial resources
- The money may need to be repaid at short notice
- The business plan is less likely to be scrutinised for errors or issues
What are the benefits of a new share issue?
- Can raise large sums of finance
- No interest payments
What are the drawbacks of a new share issue?
- Only available to companies
- Shareholders will expect to receive part of profits as dividends
- Owners may lose control of the business if they sell more than 50 per cent of all shares
What are the benefits of loans and mortgages?
- Assets can be paid for over a long period of time
- May be arranged relatively quickly
What are the drawbacks of loans and mortgages?
- Can be costly in terms of interest payments
- Collateral may have to be provided for large loans
What are the benefits of overdrafts?
- Flexible - only paid for when needed
- Can help businesses to overcome cash shortages
What are the drawbacks of overdrafts?
- Can be costly in terms of Interest charges
- Bank may ask for repayment at short notice
What are the benefits of hire purchase?
- Spreads the cost of assets such as vehicles over time
What are the drawbacks of hire purchase?
- Assets are not owned until the final payment is made
- Can have high interest payments
What are the benefits of government grants?
- May not need to be repaid
- Can provide finance for new businesses
What are the drawbacks of government grants?
- Can require complex forms to be completed
- Will only provide part of finance needed
What sources of finance would new businesses use?
- Trade credit
- Loan from family and friends
- Government grants
What sources of finance would established businesses use
- Retained profits
- A new share issue
- Loans and mortgages
- Overdrafts
