Business Finance Flashcards
Why does a business need finance
1 initial funds to start
2 working capital to run it daily
3 investment capital to help it grow
Where do start ups get finance
unlikely from external forms apart from capital of family and friends- sources will be limited until they have an effective trading record
What do suitable finance options depend on
1 how much is needED
2 how long money is required for
3 what it is used for
4 affordability of repayments
5 if personal or business assets are available
6 is owner willing to take a partner or sell shares
What is retained profit
Cheapest and most important source of internal finance
Happens when a business becomes more profitable and it builds up reserves
What is working capital
Internal source of finance achieved by reducing trade credit period and collecting debts from customers quickly- can drive customers away
Another way to generate working capital is to reduce stock holding but then if there is a surge in demand you could loose sales
How do bank loans work
Borrow a fixed amount foe a fixed period payments are made up of interest and capital one which are paid monthly.
What is security for a loan
may be in the form of property
Offering security against a loan can make it easier to get funding and reduce interest charged but increases risk to your personal assesses - if payments are not made you could loose your home
What are overdrafts
facility to withdraw from a bank account more than is in the account
Can be offered once business has established effective trading record
How much notice does bank need to give to withdraw overdraft
30 days
Why do some businesses rely on overdrafts as working capital
They often need to pay out costs before revenue is received so not enough funds to pay bills and overdraft covers the this funding deficit
What is trade credit
An interest free way to raise finance the business can buy items and pay later 30-90 days, many suppliers offer discount for early repayment
What is factoring
An alternative to an overdraft, they turn invoices into cash - a service offere by banks who will pay part of the value of an invoice
What is the advantage of leasing and HP
Enables a business to gain capital goods with out owning it by paying a monthly fee
Hp - repayment is higher but at the end of the period the business owns the asset
What is a commercial mortgage
available if a business owns a property which can be used as security against a loan. The interest rates are lower than unsecured loan. Payments ar made monthly for the term of the mortgage
Failure to pay may lead to repossession
What are sales and leaseback
asset based methods of finance. The business sells its assets to a finance company which are then leased back to them so they can reinvest the capital it also carries potential tax benefits
