Business Finance Flashcards
Define Owner’s Capital
Money invested by the owner of a business that often comes from their personal savings or cash that comes from a change in circumstance (e.g. inheritance)
Give 2 advantages of Owner’s Capital
- Can give entrepreneur more control as it does not rely on banks
- No interest is paid
Give 1 disadvantage of Owner’s Capital
- Can be a limited amount of money and not enough to meet the needs of a start up business
Define Retained Profit
Profit that is generated within the business and reinvested in order to fund expansion
Give 1 advantage of Retained Profit
- No interest is paid
Give 1 disadvantage of Retained Profit
- Profits may be limited and therefore insufficient
Define Sale of Assets
When established businesses are able to sell off assets that are no longer required (e.g. buildings or machinery)
Give 2 advantages of Sale of Assets
- The business can gain large sums of money
- No interest is paid
Give 1 disadvantage of Sale of Assets
- Smaller businesses are unlikely to have unwanted assets
Name 3 internal sources of finance
-Owner’s Capital
- Retained Profit
- Sale of Assets
Define Overdraft
When money is withdrawn from a bank account and the available balance goes below zero
Give 2 advantages of Overdraft
- Good to cover short term cash flow problems
- Flexible source of finance as businesses will only use it when needed (e.g. emergencies)
Give 2 disadvantages of Overdraft
- Can become expensive due to high interest rates
- Bank can demand full repayments within a short period of time
Define Trade Credit
When a business is able to obtain raw materials and stock but pays for them at a later date
Give 1 advantage of Trade Credit
- allows a business to make a payment once it has had the opportunity to convert the raw materials into products, and receive payment
Give 1 disadvantage of Trade Credit
- It has to be paid back so some of the profit is lost
Define Debt Factoring
Where a business sells their invoices to a factor such as a bank
Give 1 advantage of Debt Factoring
- Improves cash flow as they gain access to some cash right away
Give 1 disadvantage of Debt Factoring
- The business does not receive the full value of the invoice
Name 3 short- term external sources of finance
- Overdraft
- Trade Credit
- Debt Factoring
Define Bank Loans
Money lent to a business that is paid off with interest over an agreed period of time
Give 2 advantages of Bank Loans
- The rate of interest is fixed so the business knows the cost of borrowing in advance
- Makes it easier to plan ahead and manage cash flow
Give 1 disadvantage of Bank Loans
- There is an increased risk to personal assets because businesses must offer security in the form of property
Define Share Capital
The money raised by a business through the sale of shares in the business
Give 2 advantages of Share Capital
- Higher levels of financial flexibility
- Lower risk of bankruptcy
Give 1 disadvantage of Share Capital
- Slows down decision making process
Define Venture Capital
Money invested by an individual or group that is willing to take the risk of funding a new business in exchange for an agreed share of the profits
Give 1 advantage of Venture Capital
- The entrepreneur doesn’t have to pay the full amount back
Give 2 disadvantages of Venture Capital
- Venture capitalists want a share of the profit
- Venture capitalists want input into how the business is run
Define Business Angels
Professional investors that invest in businesses with high growth prospects
Give 1 advantage of Business Angels
- Skills, experience, and contacts are all available to the business
Give 1 disadvantage of Business Angels
- Entrepreneur has a loss of control over their business
Name 4 long- term external sources of finance
- Bank loans
- Share Capital
- Venture Capital
- Business Angels
Define Hire Purchase
When a business agrees a contract to acquire an asset by paying an initial instalment and repays the price of that asset plus interest over a period of time
Give 2 advantages of Hire Purchase
- Allows a business to spread the cost rather than use large sums of money by paying upfront
- Flexible as terms can be between 1 and 5 years
Give 1 disadvantage of Hire Purchase
- Once the final payment is made the business would own the asset
Define Leasing
Similar to renting a piece of equipment or machinery. The business pays a regular amount over a period of time but the item belongs to the leasing company
Give 3 advantages of Leasing
- Cheaper in the short term than buying equipment outright
- Equipment can be regularly updated or replaced
- Cash flow management is easier due to regular payments
Give 1 disadvantage of Leasing
- More expensive long term because the leasing company charges fees
Name 2 medium- term external sources of finance
- Hire Purchase
- Leasing
Define Commercial Mortgage
A sum of money that is borrowed from the bank that is secured against a business property and payed back in instalments over a long period of time
Give 2 advantages o0f Commercial Mortgage
- Mortgage is given for a long period of time
- Large amounts of finance can be raised quickly
Give 2 disadvantages of Commercial Mortgage
- Interest is charged on the loan
- Property can be lost to the Mortgage lender if repayments are missed
Define Government Grant
A fixed amount of money awarded by the government or charitable organisations
Give 1 advantage of a Government Grant
- Does not have to be paid back
Give 2 disadvantages of a Government Grant
- Business needs to meet certain criteria
- It is time consuming to apply for grants and complete all the paperwork
Define Sales and Leaseback
When a business sells a major asset then leases the same asset back from the new owner in order to raise finance
Give 2 advantages of Sale and Leaseback
- No interest is charged
-Can raise finance quickly
Give 1 disadvantage of Sale and Leaseback
-The business will often pay more for the asset in the long run, due to providing a ‘profit’ in the form of interest to the leasing company
Name 3 long and medium-term external sources of finance
- Commercial Mortgage
- Government Grant
- Sale and Leaseback
