Chapter 16- obtaining finance Flashcards
Internal finance
Comes from within the business. Can be retained profit or cash raised from sale of assets
Personal saving
Is an important source of finance for new or small businesses. Before getting started, the entrepreneur will save in order to fund the early expenses associated with the production process. It may also contribute to the purchase of capital equipment
Retained profit
Is profit that is being reinvested in the business rather than being given to the owners of the business in the form of dividends payments. It doesn’t incur interest payments or dilute ownership of the business. It’s a long term source of finance
Sale of assets
Can refer to physical assets such as machinery or property, or to intangible assets such as the patent to a particular product. It’s a long term source of finance
Working capital
Is cash held by the business and used to keep day to day business going in the short run
External financial
Comes from banks or investors that have no direct connection with the company
Ordinary share capital
Is long term finance raised raised by selling shares in a business. Share capital does not have to be repaid. Investors receive part ownership of the business and a share of the profits in the form of dividends
Equities
Another name for shares
Stock exchange
A market where shares in PLCs can be bought and sold. Investors can sell if for some reason reason they need the money they invested
Venture capital
Is money invested in a new business by one or more individuals who believe that the business will succeed and therefore increase in value but are willing to accept the risk that the business idea may fail. Venture capitalists may offer advice and technical support as well as finance. Is long term and may be provided in exchange for a share of the equity of a business.
Loan
Is an amount of money borrowed for a fixed period at a fixed interest rate. The loan is paid back in regular instalments until the total amount plus interest is paid. Loans are medium to long term sources of finance
Overdraft
Is a short term flexible loan where a bank allows a business to operate with a negative bank balance. Interest is paid on the amount overdrawn, usually at a higher rate than is charged for a fixed sum loan. Overdrafts are useful covering a short term debt.
Leasing
Is used by a business that needs land, buildings or equipment which they are unable or willing to buy outright. It’s the name given to renting an asset without owning it. Many businesses lease vehicles or office equipment
Trade credit
Is a short term source of finance offered when suppliers allow a time period before payment for supplies must be made. The credit period will vary between suppliers and may be changed by the supplier at anytime