Business Finance Flashcards
Name the internal source of finance.
Personal Sources.
Name the ‘long-term’ external sources of finance.
- Ordinary Shares
- Bank Loans
- Official Grants
- Venture Capital
Name the ‘short-term’ external source of finance.
Overdraft.
Describe ‘personal sources of finance’.
- Savings.
- Borrow from friends and family.
What are the advantages of ‘personal sources of finance’?
- Cheap - no interest.
- Keep control of the business by using their own money.
- Not in official debt so no adverse effect on cash outflows.
What are the disadvantages of ‘personal sources of finance’?
- Opportunity cost of using the money for other business strategies.
- Family issues if family expects money to be paid back but it isn’t.
- Personal savings may not be enough and so the business may have to use other forms of finance.
Describe ‘loan capital (overdraft)’.
- Short-term money borrowed from banks allows the business to take money out of the bank when the balance is zero.
- Variable interest rate.
What are the advantages of ‘loan capital (overdraft)’?
- Flexible and be used on a short-term basis even just for one day to cover temporary cash flow problems.
- Useful in seasonal businesses.
- Security is not usually required.
What are the disadvantages of ‘loan capital (overdraft)’?
- Higher interest charge than a loan.
- Need to provide cash flow forecasts as evidence of the overdraft needed.
- Banks can demand immediate repayment although this is rare.
Describe ‘ordinary shares (selling shares)’?
- Ltds or PLCs can sell shares (ownership of business) in return for finance.
- In return, the new shareholders receive dividends (percentage of profits made).
What are the advantages of ‘ordinary shares (selling shares)’?
- Limited liability.
- Bringing in shareholders can bring in more expertise (Ltd).
- Not in any debt,
- Only pay out dividends based on profits and not a fixed sum of money.
What are the disadvantages of ‘ordinary shares (selling shares)’?
- If the business is profitable the amount of dividends could be greater than the level of interest from a bank.
- Less control of original owners.
- Conflict of ideas between shareholders.
Describe a ‘bank loan’.
Borrowing money from a bank to pay back over a period of time on a regular basis. The business is required to provide a form of security e.g. deeds to property.
What are the advantages of a ‘bank loan’?
- Fixed interest rates.
- Interest rates usually lower than overdrafts.
- Can get exactly the amount of money needed.
What are the disadvantages of a ‘bank loan’?
- Interest charges (expensive).
- Size of loan may be limited due to security on the loan.
- Fees for paying the loan back early (have to pay additional interest to pay off early).
Describe ‘venture capital’.
- Expert investors invest for a share in the business and provide skills & experience.
What are the advantages of ‘venture capital’?
- Increase expertise of owners to provide help.
- Business is not in debt, no repayments unless profitable.
- Venture capitalists may delay their dividends if the business needs more money.
What are the disadvantages of ‘venture capital’?
- Often demand a significant share of the business.
- Owners lose control to the venture capitalist.
- Venture capitalist may exert too much influence and take the business in a different direction.
Describe ‘official grants’.
Provide free money to start-up businesses to help them get up and running e.g. Prince’s Trust.
What are the advantages of ‘official grants’?
- Free money.
- Don’t have to pay it back.
- Don’t lose control of business.
What are the disadvantages of ‘official grants’?
- Unlikely to get the full amount that you need.
- Lots of competition to get the grant.
- Have to provide evidence for the grant, such as a business plan.
