business studies Flashcards
what is finance ?
the management of large amounts of money , especially by governments or large companies
what are the internal sources of finance ?
1- Retained profit : most common way to finance , the higher the firm’s profit the more it can finance its own expansion
2- Sale of assets
what are the external sources of finance ?
- Loans
- overdraft
- Debentures
- Venture capital
- Ordinary share capital
- Leasing
- Trade credit
Loans
● Most common way is to borrow from a bank
● May be in form of a bank loan or an overdraft
● Usually set for a set period of time
● Can be repaid over time or at the end of its period
● Bank will demand collateral to provide security in case it cannot be paid back
Overdraft
● Very short term loan
● The business` account is allowed to into the red or it can be overdrawn
● Length of time this runs for will be negotiated
● Interest charges on overdrafts are a lot higher than on loans
● Firms that use overdrafts as a way of smoothing short-term cash variations
the interest rates can be quite small
Debentures
● is a medium to long-term debt instrument used by large companies to borrow
money, at a fixed rate of interest
● No collateral as it is backed up by business`good reputation
Venture Capital
● Way of getting outside investment for businesses that are unable to raise
finance through the stock market
● Interested in business with dynamic growth prospects
● Venture capitalists usually invest in small risky businesses require a large part
of the ownership of the company
● They are also likely to contribute to the running of the business
● Brings in new experience but dilutes owner’s control and decision making
Ordinary Share Capital
● Business finance that has no guarantee of repayment or of annual income,
but gains a share of the control o f the business and its potential profits
● Alternative to debt, if a business is limited (private) it may look for additional
share capital
● This can come from private investors or venture capital funds
Leasing
● For small, fast-growing businesses keeping cash flow positive is a huge
challenge
● Leasing assets is a solution to not lose cash on buying assets, meaning the
payment of a fixed monthly rental is agreed on for a fixed period instead of
buying the asset
Trade Credit
● Simplest form of external financing
● Business obtains goods and services from other business but does not repay
them immediately
● Average credit period is 2 months
● Good way of boosting day to day finance
● Other businesses may hesitate trading with other businesses if don’t get paid
in a good time
what are the alternative sources of finance ?
Business Angels/angel investors
● Take huge risks in the hope of succeeding
● Individual who provides business with capital for a business start up usually in
exchange taking a full equity risk e.g. if fails angel investor will lose everything
invested
Peer-to-peer funding
● Process of lending money to individuals or businesses through online services that
match lenders with borrowers
● Works well if there is an attractive sounding business e.g. new restaurant
what is Secured and unsecured loans?
● More time may be given to pay back secured loans than unsecured loans and
interest rates are usually lower as the lender holds your collateral and faces less risk
if you do not pay back the loan.
Borrowing cost?
● Borrowing cost from a business tends to go up when market interest rates are rising
during times of economic expansion and increased inflation
Limited Liability
*Limited liability: owners aren’t liable for debts of the business, they can lose no more than
the sum they invested (their assets will not be taken away)
- Although limited liability is useful it has a downside by giving large chances of fraud.
-Proprietors can start a business take their customers money enjoy a good lifestyle
and put the company into liquidation before customers receive the service they paid
for.
Business appropriate for limited liability
● Share capital
● Bank finance, bank loans backed up by collateral and overdrafts too
● Angel or venture capital investment
● Peer to peer or crowdfunding
● Leasing and trade credit
Unlimited Liability
*Unlimited liability: owners are reliable for debts of business and can lose their personal
assets
- Sole traders and partnerships have unlimited liability
Finance appropriate for unlimited liability business:
● Bank finance, loan or overdraft
● Leasing
● Owner’s capital (with partnerships for example)
● Trade credit
