Chapter-19 Flashcards
Business finance: needs and sources
What is start-up capital?
The capital needed by an entrepreneur when first starting a business.
What is working capital?
The capital needed to finance the day-to-day running expenses and pay short-term debts of a business.
What is capital expenditure?
Spending by a business on non-current assets, such as machinery or buildings.
What are non-current (fixed) assets?
Resources owned by a business which will be used for a period longer than one year, such as buildings and machinery.
Why are the sources of finance not suitable for sole traders and partnerships?
i) They cannot raise capital through the sale of shares.
ii) They usually only need to finance small capital expenditure projects.
iii) They are often considered too high risk by lenders for large-scale borrowing.
What is short-term finance?
Loans or debt that a business expects to pay back within one year.
Why do businesses need finance?
i) To set up the business (start-up capital).
ii) To pay day-to-day expenses (working capital).
iii) To purchase non-current (fixed) assets like buildings and machinery.
iv) To invest in the latest technology (capital expenditure).
v) To finance the expansion of the business.
vi) To finance research into new products or markets.
What is long-term finance?
Debt or equity used to finance the purchase of non-current assets or expansion plans. Long-term debt is borrowed money that is not expected to be repaid in less than five years.
What are the benefits of raising finance through the sale and leaseback of non-current assets?
i) There is no direct cost to the business.
ii) It can often raise very large amounts of money.
What is retained profit?
Profit remaining after all expenses, tax, and dividends have been paid. Profit which is ploughed back into the business.
What are two possible sources of internal finance for a business?
i) Sale of unwanted non-current assets.
ii) Sale and leaseback of non-current assets, such as selling land and buildings and then renting them back.
What are the limitations of raising finance through the sale and leaseback of non-current assets?
i) Future fixed costs will increase due to annual leasing charges.
ii) Leasing charges are likely to increase each time the lease is renewed.
iii) When the lease ends, the business may need to find new premises if the new owner uses the property for other purposes.
How can a business raise internal finance?
i) Sale of unwanted non-current assets.
ii) Sale and leaseback of non-current assets, such as selling land and buildings and then renting them back.
How can businesses use their working capital to raise additional funds?
i) Using cash balances.
ii) Reducing inventory levels.
iii) Reducing trade receivables (debtors).
What is an overdraft?
An agreement with the bank that allows a business to spend more money than they have in their account, up to an agreed limit. The loan must be repaid within 12 months.
What are the limitations of delayed payment to suppliers?
i) Any discount offered for prompt payment will be lost.
ii) The supplier may refuse further deliveries until the outstanding payment is made.
iii) If delayed payment occurs too often, the supplier may demand payment before delivery.
What is a trade receivable?
The amount owed to a business by its customers who bought goods on credit.
What is debt factoring?
Selling trade receivables to improve business liquidity.
What is a bank loan?
A provision of finance by a bank that the business will repay with interest over an agreed period of time.
What is leasing?
Obtaining the use of a non-current asset by paying a fixed amount per time period for a fixed period of time. Ownership remains with the leasing company.
What is hire purchase?
The purchase of an asset by paying a fixed repayment amount per time period over an agreed period. The asset is owned by the purchasing company on completion of the final repayment.
What is a mortgage?
A long-term loan used for the purchase of land or buildings.
What is a debenture?
Bonds issued by companies to raise long-term finance, usually at a fixed rate of interest.
What is a share issue?
Bonds issued by companies to raise long-term finance, usually at a fixed rate of interest.
What is a share issue?
A source of permanent capital available to limited liability companies.
What is equity finance?
Permanent finance provided by the owners of a limited company.
What are the benefits of debt financing?
i) Does not change the ownership of the company.
ii) Lenders have no say in the running of the company.
What are the limitations of debt financing?
i) Interest is charged, increasing business costs.
ii) Interest must be paid even if the business makes a loss.
iii)The amount borrowed must be repaid.
What are the benefits of equity financing?
i) It never has to be repaid.
ii) No ongoing cost; no dividends are required if the business makes a loss.
What are the limitations of equity financing?
i) The increase in shareholders dilutes the ownership of the company.
ii) Producing a prospectus to offer shares for sale is expensive.
What is micro-finance?
Small amounts of capital loaned to entrepreneurs in countries where business finance is often difficult to obtain. These loans are usually repaid after a relatively short period of time.
How does the size and legal form of a business influence the choice of finance?
i) nincorporated businesses like sole traders and partnerships cannot raise finance by issuing shares.
ii) Smaller businesses may find it harder to borrow from banks, as they are considered higher risk.
iii) When small businesses do borrow, they may be charged higher interest rates.
How does the amount required influence the choice of finance?
i) For large capital amounts, share issues and debentures are more appropriate.
ii) Smaller amounts can be financed through bank loans, leasing, or hire purchase.
How does the length of time for which finance is needed influence the choice of finance?
i) For long-term finance, debentures or share issues may be considered.
ii) For short-term finance, an overdraft may be the most flexible solution.
iii) The longer the finance is borrowed, the more costly it becomes due to interest payments.
How does existing borrowing influence the choice of finance?
If a business already has existing borrowing, it may be harder to borrow more, as it is seen as a greater risk.
