Busienss Finance Needs and Sources Flashcards
Reasons why business need finance
Starting up a business
Additional working capital
Expansion of an existing business
Types of sources of finance
Internal finance - when the finance is obtained inside a business
External finance - when the finance is obtained outside the business
Long term of finance - finance that is available for more than one year usually used to purchase long term fixed assets
Short term of finance - provides the working capital for the business for its day to day operations
Retained profit definition and advantages/disadvantages
Internal source of finance
A share of profit that is reinvested back into the business
- does not have to be repaid
- no interest needs to be paid
- new business wont have retained profits
- reinvesting the profits may leave less for the owners
Sales of existing assets
Assets that are no longer needed in the business is sold
- better use of tied up capital in the business
- does not increase debts for the business
- takes time to sell
- new business don’t have assets to sell
Owners savings
Internal source of finance
When the owner invests his/her own money in the business
It should be available to the firm quickly
No interest is paid
Savings may be too low
Risky if the business has unlimited liability
Bank loans
External finance, long term finance
A sum of money obtained by the bank which must be repaid and on which interest is payable
- Quick to arrange
- Can be varying time lengths
- Large companies get charge lower interest rates
- Bank loan must be repaid eventually + interest
- Security or collateral is usually required (if the bank loan is not paid then they can take your assets)
Which is bad for new business as they have to use personal possessions
Factoring debts
External finance , short term finance
When an outside business collects your debtors debts immediately and take a small percentage of it
- immediate cash is available to the business
- the business does not receive 100 percent of the debts
Crowd funding
Short term finance, external finance
When people invest/fund a small amount of money via the internet to your business
- allows to public reaction to the new business (if people are not prepared to invest then it may not be a good idea)
- fast way
- easy for new businesses to get some finance
- media and interest and publicity need to be generated to increase the chance of success
- publicising the new idea may cause others to steal it
Overdraft
Short term finance, external finance
When a business has the right to overdraw its bank account and needs to be repaid with interest
- interest will be paid only on the amount overdrawn
- usually cheaper than the short term loans
- interest are variables (not fixed like bank loans)
- bank may want the money to be repaid at a very short notice
Trade credit
Short term finance,
When a business delays paying its suppliers which leaves the business in a better cash position
- almost like an interest free loan to the business
- supplier may refuse to supply you if payments aren’t made quickly
Leasing
Long term finance,
When the business can use an asset without purchasing for it and pay for it monthly
- the business does not have to find a large cash sum to purchase the asset to start with
- the care and maintenance is handled by the leasing company
- the total costs of leasing charges will be higher than purchasing it
Alternative sources of capital
Microfinance
- providing financial services including small loans to poor people not served by traditional banks as they don’t profit over such small loans and they don’t have assets to act as a “security” for the loans
Crowdfunding
- the funding of a projects from lots of people donating small amounts of money to your venture typical via the internet, this method is often used if the traditional methods are not accessible
