business finance Flashcards
give examples of external sources of finance
bank loan
over draft
trade credit
factoring
leasing
hire purchase
commercial mortgages
sales and leaseback
share capital
business angles/ venture capitalists
government grants
give examples of internal sources of finance
retained profit / own funds
working capital
sales of assets
what is meant by external sources
money that is raised from sources outside the business
what is meant by internal sources
money that is generated from within the business or from the business owners own capital:
owners savings
sales of assets
reinvested profits
what is working capital
is the money needed to finance the day-to-day running of the business. it allows stock to be bought and wages and bills to be paid
what does investment capital do
helps the business grow
what is meant by capital expenditure
businesses just starting up need money to invest in fixed assets such as buildings and equipment
what are the advantages of using retained profit / own funds
cheapest form of finance as you do not have to pay interest on own money
immediately available
this will provide a liquidity buffer and potential funds for growth
what are the advantages of using working capital
by reducing their trade credit period and collecting debts more efficiently, a business may receive money from customers more quickly
reducing stock holding is another way to release finance
what are the advantages of selling assets
established businesses are able to sell off assets that are no longer required, such as buildings and machinery
what is a bank loan
a loan borrowing a fixed amount for a fixed period of time (perhaps 3 - 5 years)
what is overdraft
an overdraft is the facility to withdraw more from an account than is in the bank account, resulting in negative balance
what is trade credit
businesses buy items such as fuel and raw material and pay for them at a later date
what is factoring
a method of turning invoices into cash
what is leasing
the company gains use of a productive asset withot ever owning it
what is a hire purchase
method of gaining the use of capital goods, whilst gaining a monthly fee
what is a commercial mortgage
if a business owns property, a commercial mortgage may be available
what is sales and leaseback
this involves the business selling assets (buildings, machinery) to finance company and then leasing the asset back
what is share capital
a long-term method of providing funds for growth is to sell shares
what are business angel
professional investors who can invest large amounts of capital into small and medium sized businesses
what is a government grant
both local and central central government may offer finance to business start up schemes
what are the advantages of government grants
usually to small businesses in regions where unemployment is high
often, they are grants that do not have to be repaid
what are the disadvantages of government grants
they tend to be small amounts that only las for a relatively short period of time
they are also few and far between - tend to come with certain conditions which must be met
administration requirements - forms to be complete that what can be strict criteria
what are the advantages of a business angel
possibly large sums of money can be attained quickly
advice may also be given
what are the disadvantages of a business angel
will not only take a shareholding but also be fully involved in running the business
what are the advantages of share capital
share capital is a form of permeant capital; this means it does not have to be repaid
owners of shares have a say in how the business is run, but the amount of influence the have depends upon the percentage of shareholding they own
what are the disadvantages of share capital
loss of control - the business owner will have decisions influenced by new investors
new shareholder investors may be looking for a exit strategy within a few years. this means that they are expecting the business to grow rapidly and they expect to be able to sell their shares, taking their capital gain
what are the disadvantages of sales and lease back
once the item has been sold, it is no longer an asset of the business thus it is a one time option
what are the disadvantages of commercial mortgages
failure to make repayments may lead to the property being repossessed by the lender
what are the advantages of sales and leaseback
the capital that is produced can be reinvested into growing the business
an asset owned by the business can be turned into capital for reinvestment in the business
sales and leaseback also carries potential tax benefits as the leasing costs are offset as an operating expense
wat are the advantages of commercial mortgages
with a commercial mortgages the property is used as security against the loan and the loan can be as much as 60% or 70% of the value of the property
because security is being offered to the lender the interest rates will be lower than a an unsecured loan
payments are made monthly for the term of the mortgage
commercial mortgages might run for 10 to 15 years so generally have predictable costs - this can be helpful with budgeting and predicting cash flow
what are the advantages of hire purchasing
useful for purchasing machinery that can be obtained quickly
finance houses may also be less selective than banks
at the end of the hire purchase period the business will own the asset
what are the disadvantages of a hire purchase
interest rates are usually very high
add servicing charge for paying in instalments
the property is not owned by the business until the last payment has been made. items can legally be repossessed if the business falls behind with repayments
what are the advantages of leasing
the business acquired the use of resources without the need for a large sum of money
the maintenance and repair bills are met by the leasing company
leases are generally easier to obtain than loans
equipment can be updated regularly
what are the disadvantages of leasing
the business never gets to own the items leased
over a long period of time, it can be very expensive and well in excess of the purchase price
what are the disadvantages of factoring
factoring services are only offered to a business with a good trading record and reliable customers
what are the advantages of trade credit
the 30-90 days offered by the suppliers can be viewed as interest free way of raising finance
what are the advantages of factoring
banks and other financial organizations offer factoring services that pay a proportion of the value of an invoice (80-85%) when the invoice is issued. the balance, minus a fee, is paid to the business when the invoice is paid
this flexible form of finance keeps pace with business growth as the funding is directly linked to the turnover of the company
the factor will also undertake all credit management and collections work
the use of this service results in savings in administration costs which can be substantial and faster customer payments means lower interests costs on any overdraft fully
what are the disadvantages of trade credit
suppliers often offer discounts for cash or earlier payments meaning the costs of goods is higher if full credit period is used
late payments can also lead to a business gaining a bad reputation with suppliers
what are the advantages of overdraft
very useful for overcoming short term liquidity problems - useful for day to day transactions easing cash flow needs and emergency requirements
only pay interest when account is overdrawn, i.e do not have to pay off regular sum
what are the disadvantages of overdraft
may be an arrangement fee
can be called in immediately - it is repayable on demand
the overdraft limit tends to be fairly low for small businesses
interest charged can be very high indeed
what are the advantages of a bank loan
if application for the loan becomes successful, the money becomes immediately available
payments made up of interest and capital are made monthly which can help with cash flow planning
offering security against a loan can make it much easier to get funding and reduces interest rates charged
funds are made available for medium to long term borrowing of large sums of money for example if a business needs to acquire building land
what are the disadvantages of a bank loan
interest has to be paid on the loan; thus, business have tp pay back more than what they borrowed
very difficult to obtain for small businesses. it is likely that most new start ups are unlikely to receive a loan unless security is offered
some form of collateral may be required to secure the loan - if the business owner is not able to maintain payments, homes can be lost or business assets removed
what are the disadvantages of using working capital
this is likely to dive customers way and may have the opposite effect on making finance available
a sudden surge in demand could result in lost sales if the business is unable to meet delivery dates
what are the disadvantages f selling assets
smaller businesses are unlikely to have such unwanted assets and, if growth is an objective, they are much more likely to want to acquire assets as opposed to losing them
what are the disadvantages of retained profits
money is tied up in business so not earning interest
cannot use for other purposes (opportunity cost)
reserves, reinvested profit, come with only one cost - the loss of profit distribution to owners
short - term pressures to pay profits to owners (normally shareholders) can, however, restrict the availability of this form of finance
