business finance: needs and sources Flashcards
1
Q
why do businesses need finance
A
- start up capital
- capital for expansion
- working capital
2
Q
internal sources of finance examples
A
- retained profits
- sale of existing assets
- sale of inventories
- owners inventories
3
Q
retained profit advantages
A
- not repaid
- no interest to pay
4
Q
retained profit disadvantages
A
- not suitable for new businesses
- limited amount available
- may reduce payment made to owners or return to shareholders
5
Q
sale of existing assets advantages
A
- better use of assets
- debts not increased
6
Q
sale of existing assets disadvantages
A
- it takes time
- may not have spare assets to sell
7
Q
sale of inventories advantages
A
- reduces storage costs
- less capital tied up in inventories
8
Q
sale of inventories disadvantages
A
- if inventories are too low then customers are disappointed as demand is not quickly satisfied
9
Q
owner’s savings advantages
A
- available quickly
- no interest paid
10
Q
owner’s savings disadvantages
A
- may not be sufficient
11
Q
short term external sources of finance examples
A
- micro finance
- overdraft
- trade credit
- factoring debt
12
Q
micro finance advantages
A
- available to poorer groups in society
- useful if nowhere else to borrow from
- no security required
13
Q
micro finance disadvantages
A
- interest needs to be paid
- loans usually very small
14
Q
overdraft advantages
A
- interest only paid on amount borrowed
- flexible form of borrowing
- cheaper than loans in short run
15
Q
overdraft disadvantages
A
- interest rate higher than bank loan
- more expensive than loans in long run
- often asked to be repaid on demand
16
Q
trade credit advantages
A
- no interest required
17
Q
trade credit disadvantages
A
- needs to be paid or else goods not supplied
18
Q
factoring debt advantages
A
- immediate cash
- no risk of debt not being repaid
19
Q
factoring debt disadvantages
A
- receive less than the full amount of debt
20
Q
long term external sources of finance examples
A
- grants and subsidies
- bank loans
- issue of shares
- leasing
- crowdfunding
- hire purchase
- selling debentures
21
Q
grants and subsidies advantages
A
- not repaid
22
Q
grants and subsidies disadvantages
A
- may have certain conditions attached
23
Q
bank loans advantages
A
- quick to arrange
- varying repayment period
- large companies pay a low rate of interest
24
Q
bank loans disadvantages
A
- repaid with interest
- security/collateral required
25
issue of shares advantages
- do not have to be repaid
- no interest paid
26
issue of shares disadvantages
- dividends expected
- ownership could change hands
- can only be utilised by companies
27
leasing advantages
- large cash outlay not required to purchase asset
- maintenance paid for by leasing company
28
leasing disadvantages
- total payment higher than purchase price of asset
- you never get to own the asset
29
crowdfunding advantages
- uses internet to raise finance from many investors
- fast and cost effective
- good test of new business idea
30
crowdfunding disadvantages
- gives competitors detail of business idea
- may not raise all finance required
31
hire purchase advantages
- large cash outlay not required to purchase asset
32
hire purchase disadvantages
- interest paid
- asset not owned until last payment made
- may require a deposit
33
selling debentures advantages
- raises long term finance
34
selling debentures disadvantages
- repaid with interest
35
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
