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business > ch 25 sources of finance > Flashcards

ch 25 sources of finance Flashcards

1
Q

Define instalment.

A

One of a series of regular payments made until all the money owed has been repaid.

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2
Q

Define short-term finance.

A

Money borrowed for one year or less.

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3
Q

Define long-term finance.

A

Money borrowed for more than one year.

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4
Q

Define capital.

A

Finance provided by the owners of a business.

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4
Q

Define capital.

A

Finance provided by the owners of a business.

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5
Q

What are the 4 different needs for funds?

A
  • short-term needs
  • long-term needs
  • start-up capital
  • expansion
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6
Q

Define internal finance.

A

Finance generated by the business from its own means.

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7
Q

Define retained profit.

A

Profit held by a business rather than returning it to the owners and which may be used in the future.

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8
Q

Define assets.

A

Resources used or owned by a business, such as cash, stock, machinery, tools, and equipment.

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9
Q

Why do businesses prefer to use internal sources of finance?

A

They are cheap and more readily available.

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10
Q

Define external finance.

A

Finance obtained from outside the business.

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11
Q

Give examples on why short term finance would be needed for some businesses.

A
  • some businesses have seasonal trade. A farmer, for example, may need to borrow money for a few months until revenue comes in from selling the harvest.
  • a manufacturer may need finances to pay for raw materials and wages to meet a larger order.
  • a firm might be short on money because it is waiting for a customer to pay.
  • emergency expenditure.
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12
Q

Define bank overdraft.

A

Agreement with a bank where a business spends more than it has in its account (up to an agreed limit)

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13
Q

Define trade payables.

A

Buying resources from suppliers such as raw materials and components and paying them back at a later date.

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14
Q

Define mortgage.

A

Long term loan secured with property.

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15
Q

Define repossess.

A

To take back cars, furniture or property from people who had arranged to pay for them over a long time, but cannot now continue to pay for them.

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16
Q

What are 3 main sources of short-term external sources of finance?

A
  • bank overdraft
  • trade payables
  • credit cards
17
Q

What are the advantages of bank overdraft?

A

simple and flexible

18
Q

What are the disadvantages of bank overdraft?

A

The bank has the right to call in the money owed at any time.

19
Q

What are the advantages of trade payables?

A
  • it is a cheap way of raising finance
  • it means a business holds on to its cash for longer -> more flexible in use of cash
20
Q

What are the disadvantages of trade payables?

A
  • the cost of goods is often higher if firms buy on credit
  • delaying payment may upset suppliers -> bad because it is important to maintain a good relationship between the supplier and the business
21
Q

What are the advantages of using credit cards?

A
  • convenient
  • flexible
  • avoid interest charges if accounts are settled within the credit period
22
Q

What are the disadvantages of using credit cards?

A

Interest rates in credit cards are very high if accounts are not settled within the credit period, usually 56 days.

23
Q

what is the advantage of using loan capital?

A

the business will know exactly what it has to pay every month

24
Q

what is an unsecured bank loan?

A

this means that the bank lends money without the security of having a claim on your assets if you do not pay back.

25
Q

what are the disadvantages of unsecured bank loans?

A
  • some businesses may find it difficult to get an unsecured bank loan. this is because they present too much risk for banks.
  • interest rates are higher for unsecured loans compared to secured loans.
26
Q

what are the advantages of mortgages?

A
  • the interest rates are usually lower than those on unsecured bank loans.
27
Q

define debenture.

A

long-term security yielding a fixed rate of interest, issued by a company and secured against assets.

28
Q

define hire purchase.

A

buying specific goods with a loan, often provided by a finance house.

29
Q

define rights issue.

A

sale of new shares to existing shareholders at a discount.

30
Q

debenture holders are ____ of a company, not owners.

A

creditors

31
Q

what are the feature of a hire purchase agreement.

A
  • the business usually makes a down payment
  • the remaining fee is paid in monthly instalments
    the goods bought do not legally belong to the buyer until the very last instalment has been paid
  • if the buyer falls behind with the repayments, the goods can be repossessed
  • HP agreements can be short term or long term
32
Q

what are the disadvantages of hire purchase?

A

it is usually more expensive than a bank loan. this is because lenders are not as strict when checking the risk posed by borrowers.

33
Q

what are the main advantages of selling shares?

A
  • interest payments are avoided
  • do not have to pay dividends to shareholders if the business is already doing bad
34
Q

what are the disadvantages of selling shares?

A
  • shareholders will expected to be paid dividends if the business is successful
  • administration costs are costly
35
Q

define venture capitalists.

A

specialist investors who provide money for business purposes, often to new businesses.

36
Q

what do venture capitalists want from the business they invest in?

A

they prefer to take a stake in the company, which means they have some control and are entitled to a share in the profit.

37
Q

what is the problem of venture capitalists?

A
  • the business have to find a suitable venture capitalist. the business angel and the business owners must have shared interests and want the same for the future of the business.
  • the business needs tot share profits with the angel as long as they are involved
38
Q

what are the advantages of crowd funding?

A
  • form of marketing
  • low risk for an overall high reward
  • increased exposure
39
Q

what are the disadvantages of crowd funding?

A
  • difficult to get noticed
  • may take a long time to raise funds
  • low success rate
40
Q

what is risk gearing?

A
  • measures the proportion of total capital raised from long-term loans
  • the more long term loans a business has the more highly-geared it is
  • very risky -> interest has to be paid
  • banks are reluctant to lend to highly geared businesses

business (11 decks)

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