business finance: needs and sources Flashcards
why do businesses need finance
- start up capital
- capital for expansion
- working capital
internal sources of finance examples
- retained profits
- sale of existing assets
- sale of inventories
- owners inventories
retained profit advantages
- not repaid
- no interest to pay
retained profit disadvantages
- not suitable for new businesses
- limited amount available
- may reduce payment made to owners or return to shareholders
sale of existing assets advantages
- better use of assets
- debts not increased
sale of existing assets disadvantages
- it takes time
- may not have spare assets to sell
sale of inventories advantages
- reduces storage costs
- less capital tied up in inventories
sale of inventories disadvantages
- if inventories are too low then customers are disappointed as demand is not quickly satisfied
owner’s savings advantages
- available quickly
- no interest paid
owner’s savings disadvantages
- may not be sufficient
short term external sources of finance examples
- micro finance
- overdraft
- trade credit
- factoring debt
micro finance advantages
- available to poorer groups in society
- useful if nowhere else to borrow from
- no security required
micro finance disadvantages
- interest needs to be paid
- loans usually very small
overdraft advantages
- interest only paid on amount borrowed
- flexible form of borrowing
- cheaper than loans in short run
overdraft disadvantages
- interest rate higher than bank loan
- more expensive than loans in long run
- often asked to be repaid on demand
trade credit advantages
- no interest required
trade credit disadvantages
- needs to be paid or else goods not supplied
factoring debt advantages
- immediate cash
- no risk of debt not being repaid
factoring debt disadvantages
- receive less than the full amount of debt
long term external sources of finance examples
- grants and subsidies
- bank loans
- issue of shares
- leasing
- crowdfunding
- hire purchase
- selling debentures
grants and subsidies advantages
- not repaid
grants and subsidies disadvantages
- may have certain conditions attached
bank loans advantages
- quick to arrange
- varying repayment period
- large companies pay a low rate of interest
bank loans disadvantages
- repaid with interest
- security/collateral required
issue of shares advantages
- do not have to be repaid
- no interest paid
issue of shares disadvantages
- dividends expected
- ownership could change hands
- can only be utilised by companies
leasing advantages
- large cash outlay not required to purchase asset
- maintenance paid for by leasing company
leasing disadvantages
- total payment higher than purchase price of asset
- you never get to own the asset
crowdfunding advantages
- uses internet to raise finance from many investors
- fast and cost effective
- good test of new business idea
crowdfunding disadvantages
- gives competitors detail of business idea
- may not raise all finance required
hire purchase advantages
- large cash outlay not required to purchase asset
hire purchase disadvantages
- interest paid
- asset not owned until last payment made
- may require a deposit
selling debentures advantages
- raises long term finance
selling debentures disadvantages
- repaid with interest
factors affecting choice of source of finance
- amount required
- size of business organisation
- type of business organisation
- control over the business
- risk and gearing (if it already has loans)
- purpose of finance
- period of time for which finance is required
