CH29 - Sources Of Finance Flashcards
What is Retained earnings?
Profit after tax which is retained by a company rather than paid out to shareholders dividends
What is the sale of unwanted assets?
Established companies often find assets that are no longer fully employed these could be sold to raise cash
What is working Capital?
Capital needed to pay for raw materials, day to day running costs
What is the process of selling and leaseback of non current assets ?
Sale of non-current assets that they intend to use but which they do not need own. These assets can be sold and leased back to the company, will raise capital but the lease payment will become an additional fixed cost.
What is a bank overdraft?
A credit that a bank agrees can be borrowed by a business up to an agreed limit as and when required
What is trade credit?
Delaying payment to suppliers for goods and services , suppliers become trade payables / creditors
What is debt factoring?
The selling of goods on credit, creates trade receivables
What is hire purchase?
Company purchases an assets and agrees to pay fixed repayments over an agreed period of time . Assets belongs to purchasing company until final payment
What is leasing?
Obtaining the uses of an asset and apaying a leasing charge over a fixed period, avoiding the need for a business to raise long-term capital to buy the asset . The asset is always owned by the leasing company
What is a long term bank loan?
Loans that do not have to be repaid for at least one year
What are debentures?
Long term bonds issued by companies to raise debt finances, often with a fixed rate of interest
What is a business mortgage?
Long-term loans to companies purchasing a property for business premises with the property acting a s collateral security on the loan
What is share (or equity) capital?
The total value of capital raised from shareholders by the issue of shares
What is venture capital?
Risk capital invested in a business star-ups or expanding small business that have good profit potential but do not find it easy to gain finances form other sources
What is micro finance?
Providing financial services for poor and low-income customers who do not have access to the banking services, such as loans and overdrafts, offered by traditional commercial banks
What is crowd funding?
The use of small amounts of capital from a large numbers of individuals to finance a new business venture
What are 3 examples of internal source of finance?
Retained earnings
Sale of unwanted assets
Working capital
Sale and lease back of non-current assets
What are 3 examples of external sources of finance?
Bank overdraft
Trade credit
Long term bank loan
(Business Mortgage)
Advantage of retained earnings
Represent a permanent source of finances after being re-invested into the business
Advantage and disadvantage of Sale of unwanted assets
AD - No direct cost to the business , no increase in liabilities or debt and no risk of losing control
DIS - If used for expansion can slow down overall business growth
Advantage and disadvantage of Working Capital
AD - No direct cost to the business , no increase in liabilities or debt and no risk of losing control
DIS - If used for expansion can slow down overall business growth
Advantage and disadvantage of Sale and leaseback of non-current assets
AD - No direct cost to the business , no increase in liabilities or debt and no risk of losing control
DIS - Will be an additional charge for leasing
If used for expansion can slow down overall business growth
Advantage and disadvantage of a Bank Overdraft
AD - Cover costs if customers do not pay on time or large delivery needs paying
DIS - Carries high interest and bank can call in the overdraft and force the firm to pay it back
Advantage and disadvantage of Trade Credit
AD - Delay the payment to suppliers leaving the business with capital - Can allow business to stay afloat for longer
DIS - Payment is required and not free, discounts for quick payments are often lost if the business takes too long to pay its suppliers
Advantage and disadvantage of Debt Factoring
AD - Helps business stay afloat if they are failing
DIS - Longer period of time, the more money the business needs to find to carry on trading - small amount of profit is given to the credit loan firms
Advantage and disadvantage of Hire Purchase
AD - Avoids making a large initial cash payment to buy asset
DIS - The asset is owned by the purchasing company until final payment, interest rates can be higher than a bank loan - Payments have to be made
Advantage and disadvantage of Leasing
AD - The risk of using unreliable or outdated machinery is reduced as the machine is not owned by the business. The risk of not finding a buyer if it needs to be sold is not on the business.
DIS - The business will never own the asset unless a payment is made to buy the asset outright
What are Capital Goods?
Physical goods to aid in production
What is capital expenditure?
Purchase of non-current assets expected to best for more than one year
What are non-current assets?
Long term assets of a business which are not expected to be sold in the next year
(TANGIBLE & INTANGIBLE & DEFERED TAX )
What are current assets
Short term assets of business which are likely to be turned into cash in the next year
(INVENTORIES & TRAD/OTHER RECIVABLES & CASH)
What are non-current liabilities ?
