Business finance : needs and sources 5.1 Flashcards
Why do businesses need finance
To start up business - buy equipment and land
Expand the business - Buying more land to expand factory
Pay day to day expenses - paying employees and buying materials
What is short term finance
working capital for day to day expenses
What is long term finance
Finance that is available for over a year
What are the internal sources of finance
Retained profit
Selling existing assets
Selling inventory
What are the advantages and disadvantages of retained profit
The money does not need to be paid as they are not borrowing money
Profits may not be enough for what they want to do
What are the advantages and disadvantages of selling existing profit
Debts does not increase from this
May take time for asset to sell
What are the advantages and disadvantages of selling inventory
Lowers storage costs
Opportunity cost when selling to a customer for high price
What are examples of external sources of finance
Selling shares to shareholders
BAnk loans
Government grants
What are the advantages and disadvantages of selling shares to shareholders
Capital raised does not need to be repaid to shareholders
Shareholders will be expecting profits to be shared with them as dividends
What are the advantages and disadvantages of bank loans
Fast source of finance
Money will need to be repaid with interest
What are the advantages and disadvantages of government grants
Money does not need to be paid back
Time consuming to apply for the grant
What are examples of short term finance
Overdraft – bank arrangement to withdraw more money than the businesses actually has. This is later paid back by the business with interest.
Buying on credit – Businesses can pay suppliers on a later date by buying supplies on credit.
What are examples of long term finance
Leasing – Renting for a certain amount of time and paying owner
Hire purchase – Businesses can buy an asset and pay the manufacturer over time and not at once
What is the importance of alternative sources of capital
Some countries may be developing and some sources of capital may be difficult to obtain. So other sources such as crowdfunding and micro finance is used
What is microfinance
Providing small loans to poor people not served by traditional banks
