Business Financial information and financial decisions Flashcards
Retain profit
Advantage - Retained profit does not have to be repaid unlike a loan
There is no interest to pay– the capital is raised from within the business disadvantage - A new business will not have any retained profits
Keeping more profit in the business reduces payments to owners for example dividends to shareholders who might invest in other business instead.
Sources of internal finance
Retained profit -
Sale of existing assets -
Sale of inventories to reduce inventory levels -
Owner savings -
Sale of existing assets
Advantage - This makes better use of tight up in the business
It does not increase the debts of the business
Disadvantage - it may take some time to sell these assets and the amount is never certain until the asset is sold
This finance is not available for new businesses as they have no surplus assets to sell
Sale of inventories to reduce inventory levels
Advantage - this reduces the opportunity cost and storage cost of high inventory levels
Disadvantage - it must be done carefully to avoid disappointing customers, If not enough goods are kept as inventory.
Owners savings
Advantages - it should be available to firm quickly
No interest is paid
Disadvantage - sales may be too low
It increases the risk taken by the owners as they have unlimited liability
Sources of external finance
Issue of shares
Bank loans
Selling debentures
Factoring of debts
Grant and subsidies from outside agencies alternative sources of capital
micro finance
crowdfunding
Issues of shares
Advantage- no interest
This is a permanent source of which wouldn’t have to be paid to shareholders
Disadvantage-dividends are paid after tax with interest on loans is paid before tax is deducted.
Dividends will be expected by the shareholders.
Bank loans
Advantages-Large companies are often offered low rates of interest by banks if they borrow large sums
These are usually quick to arrange
Disadvantage-A bank would have to be repaid eventually and interest must be paid
Security or collateral is usually required. This means if you cannot be able to pay they would seize your assets and sell them.
Selling debentures
Advantage- debentures can be used to raise a very long finance for example 25 years
Disadvantage-as with loans these must be repaid at interest must be paid
Factoring of debts
Advantage - immediate cash is made available to the business
disadvantage -the business does not receive 100% of the value of its debts
Grants and subsidies from outside agencies e.g. government
Advantage -these grants and subsidies usually do not have to be repaid
disadvantage - they are often with strings attached for example the firm must locate in a particular area
Micro finance
Banks do not lend because:
The size of the loans required by poor customers – perhaps a few dollars – meant that the bank cannot make a profit from the loans
The poor groups in society often have no assets to act as security for loans – banks are usually not prepared to take risk by lending without some form of security (assets they can sell if the borrower cannot repay)
Crowdfunding
Advantages -no initial fees are payable to the crowdfunding platform. Instead, if the finance required is raised, the platform will charge a percentage fee for this amount
Disadvantages- Media interest and publicity needed to be generated to increase the chance of success
If the total amount required is not raised, the finance that has been promised will have to be repaid
Short-term finance
Overdraft
Trade credit
Factoring of debts
Overdraft
Advantage - The bank gives the business the right to overdraw its bank account that is spending more money than is currently in the account
Overdraft can be cheaper than short-term loans
Disadvantage- interest rates are variable unlike most loans which have fixed interest rate.
The bank can ask for the overdraft to be paid at very short notice
