AS2 TP8 Flashcards
what are the possible sources of finance of a sole trader
owners savings, banks, government grants
what issues could rise from these sources of finance
loss of control from owner
financial history of business
security for those lending funds
possible sources of finance of a private limited company (LTD)
banks, venture capital institutes, private share sales
issues that could rise from these sources of finance
disagreement among existing shareholders
difficulty finding suitable shareholders
risk of a loan
possible sources of finance of a public limited company (PLC)
banks, venture capital institutes and public share issues via stock exchange
issues that could rise from these sources of finance
state of market/economy
recent financial performance
business reputation
what is internal sources of finance
can be obtained within business and carries no additional cost to business
what is retained profit
profits from previous years reinvested back into business for growth and expansion
advantages retained profit
no debt
no interest payments
no cash flow problems for repayments
disadvantages of reinvesting profits
only applies to existing business that can retain profit
may not have enough retained profit
what is controlling working capital
reducing costs, delaying outflows and speeding up inflows
purpose is for start ups for sole traders and partnerships
advantages of controlling working capital
no debt
no cash flow issues for repayment
doesn’t attract interest payments
disadvantages of controlling working capital
limited liability
owners can lose their investment
what is sale of assets (source of finance)
disposal of assets no longer required by business, purpose is to increase cash quickly for day 2 day running of business
advantages of sale of assets
raises finance quickly without requiring debt/ interest charges
disadvantage of sale of assets
very few business’ have assets for sale that won’t affect their operation
what is an overdraft (external source of finance)
an agreement with a bank to be allowed to overdraw a certain amount purpose is to assist with everyday running of business
advantages of an overdraft (short term)
very flexible form of finance as amounts borrowed vary
simple to arrange - established business customers can usually increase limit easily
banks are more receptive to overdrafts as they are short term and confined to certain amount and time period
disadvantages of overdraft
overdrafts can be quite expensive as have high interest
banks can demand immediate repayments
large penalty charges If overdraft amount is exceeded
what are bank loans
amount of money loaned by bank with an agreed interest rate and specified monthly repayments
advantages of bank loans
business keeps ownership and control intact while loan is being repaid
interest rate is fixed and cannot be changed over course of loan
disadvantages of bank loans
if bank lending capital considers the loan in any way risky they can charge higher interest rate
banks often require security for their loans usually in terms of property known as collateral
what is hire purchase
loan by a lender that pays the full amount of a purchased asset
advantages of hire purchase
allows business to purchase assets without having the full finance to hand over
business pays small deposit and repays the balance monthly
assets belong to business on final payment
what is leasing
renting an item
advantages of leasing
as equipment is leased and not owned if it breaks leasing company pays repairs
asset never has to belongs to business
equipment can be replaced or updated quickly
disadvantages of leasing
business never actually owns item
can become expensive long term
what is trade credit
suppliers allow customers extra time to pay for goods purpose to help with cash flow
advantages of trade credit
business has sold inventory
aids with cash flow
disadvantages of trade credit
suppliers can renew trade credit agreement and reduce time period causing cash flow problems
what is debt factoring (medium term)
use of a company to collect all debts owned to business
business can sell these bills owed to them to banks for immediate cash
advantages of debt factoring
immediate cash provided means firm is likely to have lower overdraft requirements and pay lower interest
improves cash flow
disadvantages of debt factoring
business dent receive full amount as lender charges a fee
if they have difficulty claiming money from debtor business may be required to pay full amount
what is sale and leaseback
business sells its premises for full value and rents from new owner
advantages of sale and leaseback
sale of premises releases major funds enabling business to expand and grow
no repayments, interest but earn interest on deposits
disadvantages of sale and leaseback
rent now payable to new owner reducing profits
new owner can increase rent
what is venture capital
people invest in the company when its unable to float on stock market purpose is to invest in early stages usually on high risk start ups with high potential
advantages of venture capital
strive to increase company profits and dividends as they are shareholders
venture capital investors don’t only provide capital but experience, contacts and advice
disadvantages of venture capital
they can sell on they shareholding to others when they have reached target returns
what are mortgages (long term)
long term loan to purchase land and premises
advantages of a mortgage
gives business long time to repay
disadvantages of a mortgage
possible for total repayment to double depending on interest and time its repaid
value of premises may not increase and mortgage may decrease over time
what is share capital
private and public limited companies can raise new finance by selling new shares
advantages of share capital
provides route to raise substantial capital from existing and new shareholders
no interest or repayments due
disadvantages of share capital
ownership is diluted with increased shareholders
have to pay increased dividends as shareholders increase
what are debentures
large plc’s can obtain finance through issuing a long term loan to parties who aren’t shareholders of company and the debt can be sold to other parties
advantages of debentures
fixed rate of interest is paid throughout debenture period
future cash flow commitments are known in advance
debenture loans are more secure than investing shares in company
disadvantages of debentures
debenture interest is payable regardless if business is profitable
