Chapter #6 - Sources Of Finance Flashcards
Source of finance
The way in which an enterprise gets the money it needs to finance an activity.
Finance
The activities of an enterprise relating to money.
Start-up
he period of an enterprise when it is first set up.
Internal source of finance
Money that is found within the enterprise.
Interest
Often, when an enterprise borrows money from a lender they will have to pay back the amount they borrow plus an agreed amount. The additional amount is known as the interest.
What sources of finance are suitible for start-up enterprises + are they external or internal?
- Personal savings (in)
- Investment from family and friends (ex)
- Bank overdrafts (ex)
- Bank/building society loan (ex)
- Leasing (ex)
- Mortgages (ex)
- Community (ex)
- Grants (ex)
- Subsidies (ex)
- Crowdfunding (ex)
- Selling shares (ex)
Description of personal savings
(source of finance)
A small investmnent in a business, normally paid back in with interest (a return on the investment).
Advantages of personal savings
(source of finance)
You do not need approval to use your own money.
Disadvantages of personal savings
(source finance)
If the enterprise is unsuccessful you may lose all the money you invested- this may cause hardship.
Description intvestment from family & friends
(source finance)
A small investment from family or friends in a business normally paid back with interest (a return on investment).
Advantages of investment from family & friends
(source finance)
- Family & Friends will often be keen to support your enterprise.
- Usually charge lower interest than other lenders
Disasntages of investment from family & friends
(source finance)
- Enterprise is unsuccessful => may lose all the money that friends & family have invested
- Can cause upset
- Can cause hardship
Description of bank overdraft
(source finance)
A form of short term lending by the bank when there is no money left in the enterprise’s bank.
Advantages of bank overdraft
(source finance)
Can cover a short term financial issue.
Disadvantages of bank overdraft
(source finance)
A very short term option as interest is charged at a very high rate.
Description of bank/building society loan
(source finance)
A larger, longer term investment, payed back at an agreed interest rate
Advantages of bank/building society loan
(source finance)
Larger sums of money are available.
Disadvantages of bank/building society loans
(source finance)
- Must provide detailed finacial information to get the loan approved.
- Inetrest rates can be very high
- If you fail to male payments on the loan the bank
Description of leasing
(source finance)
Renting equipment or property
Advantages of leasing
(source finance)
- Lower initial cost
- Maintenance included
Disadvantages of leasing
(source finance)
- No ownership
- Can me expensive long-term because the fees may come to more than the equipment would have cost
Description of mortgages
(source finance)
Long-term loan secured on property (used to buy property) paid back at agreed interest.
Advantages of mortgages
(source finance)
- Large sums of money can be borrowed to buy property for business
- Lower interest than other forms of borrowing.
Disadvantages of mortgages
(source finance)
- Must provide detailed financial information to have mortgage approved.
- Fail to make payments of time => bank may sieze property that was bought using mortgage.
Description of community sources
(source finance)
Support from local communities/organzatisations by setting up fumds that can be used for projects that support community.
Advantages of community sources
(source finance)
- Supportive terms
- Brings money into the community
- Improves lives of those in community
- Does not have to be repaid
What sources of finance have no interest?
- Grants
- Subsides
- Crowdfunding
- Selling shares
- Community sources
Disadvantages of community sources
- Can only spend on a community project
- Limited amounts
- Competitive application
- If you don’t use the money as agreed, it may be taken away from you.
Description of grants
Money offered to enterprises, ususally by governments, for specific projects.
Advantages of grants
- Can bring income into enterprises for expensive projects
- It does not have to be paid back
Disadvantages of grants
- Difficult to obtain
- Only allowed to spend money on specific project
- If money is not used as agreed, money can be taken awa from you.
Description of subsides
Financial assistance to reduce start-up costs. This is provided by government to a particular enterprise to support its development or public benefit. Subsides may be some form of cash payment or a reduced tax.
Advantages of subsides
- Reduces costs
- No repayment
Disadvantages of subsides
- Only available for specific types of enterprises.
- Compliance requirement (enterprise may have to meet certain conditions in order to get subsidy)
Description of crowdfundings
Raising money from many people using websites and social media to encourage lots of people to to invest small amounts in return for a stake of the company.
Advantages of crowdfunding
- Wide investor access. So, even though each person invest very small amount, the overall sum is large
- Idea validation
Disadvantages of crowdfunding
- Enterprise fails => each investor loses money
- Strong marketing needed
- May never raise money wanted (poor at using social media + websites)
Description of selling shares
Selling ownership shares and the profits of enterprise to investors (called a dividend when paid to shareholders).
Advantages of selling shares
- Possible to raise large amounts of money (large capital)
- No repayment obligation (but if company sells must give a percent of money)
Disadvanatages of selling shares
- Dilute ownership and share profits
=> shareholders expect to have their say in how enterprise is run - Selling too many shares can open up enterprise to being bought over completely and taken over
External sources of finance
Money that is found outside the enterprise
Assets
Objects that are owned by the enterprise
Founders
The people who start a company
What types of finance can an enterprise use to continue trading or expanding? Are they inetrnal or external?
- Personal savings (int)
- Retained profits (int)
- Private institutions (ext)
- Venture capital (ext)
- Issue shares (ext)
Private institutions description
- Typically a microfinance lender
- Aids people who do not have enough income to access traditional bank loans.
- Microfinance organizations focus on helping entrepreneurs succeed
- As part of the agreement they require the borrower to take a money management course.
Private institutions advantages
- No interest
- Can access small loans with very little income
- brrowers get training on how to manage their money
Private institutions disadvantages
- higher interset rates than banks
Source and intereste of private institutions
External, no interest
Description of retained profits
Profits kept in the business for reinvestment
Retained profits advantages
- No interest
- No repayment
- No approval needed
Retained profits disadvantages
- Dependant on business preformance
- If you have shareholders, you may have to consult them on how much you can retain (because it lowers the dividend they get paid)
- If your company has shareholders, they may impose conditions on how money can be used
Venture capital description
Investement from venture capitalists (an individul or samll group which weigh up risks and rewards of investing). They expect a share of the enetrprise if they invest.
Venture capital advantages
- Large amounts
- Are expirienced entrepreneurs with lots of knowledges and skills which can help business
Venture capital disadvantages
- Loss of control as venture capitalists expoect to control a lot of decision making in enetrprise (can lead to conflict)
- Share of profits
Issue shares description
Selling ownership shares to investors (to existing shareholders or new people).
Issue shares advantages
Possible to raise large amounts of money
Disadvantages of issue shares
- Shareholders may expect dividends not only ownership
- seling too many shares can risk enterprise being bought over completely and taken over
