business finance Flashcards
What is working capital?
money needed to finance the day-to-day running of a business
What is investment capital?
Funds used to help a business grow.
What is capital expenditure?
Money invested in fixed assets such as buildings and equipment, especially for new businesses.
What factors determine the most suitable finance option for a business?
- Amount of funding needed
- Duration of finance requirement
- purpose of the finance
- affordability of repayments
- Availability of assets as security
- Willingness to give up ownership (e.g., through selling shares)
What are internal sources of finance?
Retained profit, working capital, and the sale of assets.
What are the advantages of retained profit as a source of finance?
- No interest payments
- Immediately available
- Provides a liquidity buffer and funds for growth
What are the disadvantages of retained profit?
- Opportunity cost (cannot be used elsewhere)
- Shareholders may expect profit distribution instead
- Short-term pressure to pay dividends can limit retained profit availability
What are the advantages of working capital as a finance source?
- Faster cash inflow by reducing trade credit periods
- Reducing stock levels can release finance
What are the disadvantages of working capital?
- May drive customers away
- Insufficient stock can lead to lost sales
What are the advantages of selling assets as a source of finance?
Established businesses can sell unneeded assets (e.g., machinery, buildings)
What are the disadvantages of selling assets?
- Small businesses may not have unwanted assets
- Businesses focused on growth may need to acquire, not sell, assets
What are external sources of finance?
Bank loans, overdrafts, trade credit, leasing, hire purchase, share capital, business angels/venture capitalists, government grants.
advantages of bank loans
- Immediate access to funds if approved
- Predictable repayment structure (interest + principal)
- Suitable for medium- to long-term borrowing
disadvantages of bank loans
- Interest costs
- Hard to obtain for small businesses
- Collateral may be required, risking assets if payments aren’t met
What is an overdraft?
A facility allowing a business to withdraw more than is in its bank account, resulting in a negative balance.
advantages of an overdraft
- Helps with short-term liquidity issues
- Interest only charged when overdrawn
disadvantages of an overdraft
- High interest rates
- Limited borrowing amount
- Can be recalled at any time
What is trade credit?
financing method where businesses buy goods and pay for them later.
advantages of trade credit
- 30-90 day repayment period
- Interest-free finance during credit period
disadvantages of trade credit
- Higher cost of goods if discounts for early payment are missed
- Late payment can harm supplier relationships
advantages of leasing
- No large upfront payment required
- Maintenance and repairs covered by leasing company
- Easier to obtain than loans
disadvantages of leasing
More expensive in the long term
Business never owns the asset
What is hire purchase?
method of acquiring assets by paying in installments, with ownership transferred after final payment.
disadvantages of hire purchase
High interest rates
No ownership until last payment
Additional servicing charges
