Business finance Flashcards
Define sources of finance
The options available to a business when seeking to raise funds to support future business actions
List the sources of finance
Debt factoring, overdrafts, retained profit, share capital, loans, venture capital and crowd funding
What is debt factoring (external)
The process of selling the debts owed to a business to a financial institution, the business receives 80% of the total value of the debt immediately
What are the advantages of debt factoring
Receive majority of the debt instantly, good source of short term finance to address cash flow issues, debts are chased by experts to save time, reduces risk of bad debt
What are the disadvantages of debt factoring
Reduces profitability of the firm as they do not receive the whole debt, may damage reputation as they are seen as desperate
What is an overdraft (external)
The facility to overspend on a current account up to an agreed sum, the business can withdraw money from an account that is not there meaning they go in the red, interest is charged on this amount
What are the advantages of overdrafts
Only borrowed when needed so its flexible, only pay for the amount borrowed, quick and easy to arrange, no charges for paying it off
What are the disadvantages of overdrafts
The bank can call it in at any time, only available from a current account, variable interest payments make it hard to budget, may be secured by assets
What is retained profit (internal)
Profit kept within a business from profit for the year to help finance future activities
What are the advantages of retained profit
Avoids interest, does not dilute ownership
What are the disadvantages of retained profit
Only possible if profit is retained, reduces dividend payments, reduces security blanket
What is share capital
Finance raised from the sale of shares
What are the advantages of share capital
Only pay dividends if a profit is made, possible to raise large amounts of finance, no interest
What are the disadvantages of share capital
Loss of ownership, loss of control (hostile takeovers) are more likely, complex and costly process
What is a loan (external)
A set amount of money provided for a specific purpose, to be repaid with interest over a set period of time
What are the advantages of loans
Quick and easy to secure, fixed interest rate makes budgeting easier, improves cash flow, borrower retains ownership
What are the disadvantages of loans
Interest must be paid, may be seen as high risk, normally has to provide assets as security, usually more expensive, charged a penalty for early repayment
What is venture capital
Investment from an established business into another business in return for a percentage equity in the business, they usually also mentor the owners
What are the advantages of venture capital
Large sums of money, expertise to help the business, easier to attract other sources of finance, easy to expand
What are the disadvantages of venture capital
A long and complex process, financial projections are required, initially expensive (legal and accounting fees), partial loss of ownership and risk of conflict
What is crowdfunding
Raising finance from a large number of people each investing different (often small) amounts of money, the business promotes what they money is for and their predicted return on investment
