6.1 Sources of finance Flashcards
Why do new businesses need to raise finance? (5)
- Rent or buy a building: shop, office or factory - likely to be relatively expensive.
- Vehicles: may require cars to visit customers and suppliers, and vans or lorries to deliver products.
- Advertise: won’t be known by potential customers unless promoted - likely to spend large amount to do this.
- Capital: may require some equipment or machinery, especially if planning to manufacture products.
- Inventory: needed if a shop has anything to sell.
Why do established businesses need to raise finance? (3)
- To expand: buy additional shops, factories or offices, or recruit new employees by entering new markets or selling more in existing markets.
- To improve efficiency: by training employees or purchasing technology for production - help produce high quality products faster and with fewer resources.
- To develop new products: by paying for scientific research, new production facilities or advertisement to inform customers - costly but common way to compete.
What influences the sources of finanace suitable for new businesses? (3)
Personal finance: redundancy pay or funds from selling their house - the more personal finance an entrepreneur has, the less they have to borrow.
Legal structure: if the business becomes a private limited company, it can sell shares if all shareholders agree.
Riskiness of business: if deemed risky, banks may be unwilling to offer mortgages, loans or overdrafts incase they aren’t repaid - owner dependant other sources available.
What influences the sources of finance suitable for established businesses? (5)
- Profitability: profitable business can use retained profits and more likely to persuade bank for loan as it should be able to repay.
- Assets owned: businesses with a-lot of assets can sell and lease them back or use them as collateral against a loan.
- Past history and future prospects: businesses known for paying loans on time or are predicted to make a profit are more likely to have a loan accepted.
- Legal structure: public limited companies can sell shares on Stock Exchange.
- Amount needed: if a large amount is needed, banks may not be willing to offer all the finance and selling shares to meet the need may cause loss of business control, so businesses may use multiple sources to avoid these singular disadvantages.
What is meant by “internal sources of finance”?
Money available within a business.
What are the examples and definitions of internal sources of finance? (4)
- Owner’s funds: Money put into the business by the owner.
- Retained profits: Money kept in the business by the owners.
- Selling assets: Selling items owned by business to make money.
- Trade credit: When suppliers agree to be paid later when providing goods now.
What are the advantages and disadvantages of owner’s funds as a source of finance? (1|2)
Benefits:
- No interest payment.
Drawbacks;
- Could have been invested elsewhere to earn higher profit.
- May not be enough to meet needs of business.
What are the advantages and disadvantages of retained profits as a source of finance? (2|3)
Benefits:
- No interest payment
- Can be immediately available so no business opportunity missed.
Drawbacks:
- Could’ve been invested elsewhere, earning a higher profit.
- May not be enough to meet needs of business.
- Shareholders may become unhappy if this causes lower dividends payments.
What are the advantages and disadvantages of selling assets as a source of finance? (1|2)
Benefits:
- No need take on loans or pay any interest or charge - using money it already has.
Drawbacks:
- Has to be asset with value.
- May sell asset later needed.
What are the advantages and disadvantages of trade credit as a source of finance? (1|2)
Benefits:
- Gives business time to make more cash to use in immediate future.
Drawbacks:
- Can only be used to buy certain goods.
- Bills usually have to be settles within 30, 60 or 90 days.
What is meant by “external sources of finance”?
Money that comes from outside the business.
What are the examples and definitions of external sources of finance? (7)
- Bank Loan: An amount of money from the bank to be repaid with interest over a set period of time.
- Mortgage: Long term loan from the bank to buy property.
- Overdraft: An agreement to overspend on an account to a specific limit.
- Share issue: Money raised through sales of shares to buy assets.
- Family and friends: Money is informally given from friends.
- Hire purchase: An item which is bought then paid for in instalments before it is owned by the business.
- Government grants: Money given to business by government.
What are the advantages and disadvantages of bank loans as a source of finance? (3|2)
Benefits:
- Easy and quick to set up.
- Large quantity can be borrowed.
- Structured repayment term.
Drawbacks:
- Interest payment/payable
- If repayments aren’t kept up, the business risks poor credit rating or becoming bankrupt.
What are the advantages and disadvantages of mortgages as a source of finance? (2|2)
Benefits:
- Only method available to buy property.
- Structured repayments over long term (25 years).
Drawbacks:
- Large sums of interest charged.
- Can take long time to repay debt.
What are the advantages and disadvantages of overdrafts as a source of finance? (2|3)
Benefits:
- Quick to arrange.
- Good short term solution to cash flow problems.
Drawbacks:
- Only suitable for smaller amounts.
- Has to be repaid within a short amount of time.
- Interest or charges are paid.
What are the advantages and disadvantages of share issue as a source of finance? (3|3)
Benefits:
- No need to repay money invested.
- Cheaper than loan.
- Possible to raise large sums this way.
Drawbacks:
- Need to pay shareholders a share of future profits.
- Original owners may lose control over business and decisions made.
- Risky for shareholder - investment may be lost if business fails.
What are the advantages and disadvantages of family and friends as a source of finance? (2|3)
Benefits:
- Easy to arrange.
- Often lent interest free.
Drawbacks:
- May take long time to acquire all finance - miss opportunities.
- May not be enough money.
- My require it back suddenly.
What are the advantages and disadvantages of hire purchase as a source of finance? (1|2)
Benefits:
- Flexible method - can hand back item if no longer required and payment stops.
Drawbacks:
- High interest often charged.
- Item doesn’t belong to business until end of term.
What are the advantages and disadvantages of government grants as a source of finance? (1|3)
Benefits:
- No need to repay the grant.
Drawbacks:
- Limited funds available.
- May need to meet strict conditions.
- May have restrictions on usage of money.
