Chapter 6 - Sources of Finance Flashcards
What are some things an enterprise might use money for?
- buy or rent premises
- purchase equipment
- funds for introducing new products/services
- funds for replacing equipment
What is the name given for the many ways an enterprise can get money?
sources of finance
Define sources of finance
the way in which an enterprise gets the money it needs to finance an activity
Define finance
the activities of an enterprise relating to money
Define start-up
the period of an enterprise when it is first set up
Define internal sources of finance
money that is found within the enterprise
Define interest
often, when an enterprise borrows money from a lender, they will have to pay back the amount they borrows plus an additional agreed amount. the additional amount is known as interest
What are the different sources of finance that could be used by an enterprise?
- personal savings
- investments from family and friends
- bank overdrafts
- bank / building society loan
- leasing
- mortgages
- community sources (e. g. go fund me)
- grants
- subsidies
- crowd funding
- selling shares
Define External sources of Finance
money that is found outside the enterprise
Define assets
objects that are owned by the business
Define founders
the people who start a company
What are the main types of finance an enterprise may have to access to continue trading or expand?
- personal savings
- retained profits
- private institutions
- venture capital
- issue shares
Describe personal savings and give some advantages and disadvantages
Description: a small investment in a business, normally paid back with interest
Advantages: you do not need approval to use your own money. if it is successful get your money back plus interest
Disadvantages: if the enterprise is unsuccessful, you may lose all the money you invested, this may cause hardship
Describe investments from family and friends and give some advantages and disadvantages
Description: a small investments in a business normally paid back with interest
Advantages: family and friends will often be keen to support you and your enterprise. they usually charge lower interest than other lenders, such as banks
Disadvantages: if the enterprise is unsuccessful, you may lose all the money that friends and family have invested, this can cause upset and hardship
Describe bank overdrafts and give some advantages and disadvantages
Description: a form of short term lending by the bank when there is no money left in the enterprise’s bank account
Advantages: can cover a short term financial issue
Disadvantages: a very short term option as interest is charged at a very high rate
Describe bank / building society loan and give some advantages and disadvantages
Description: a larger, longer term investment paid back at an agreed interest rate
Advantages: larger sums of money are available
Disadvantages: you need to provide detailed financial information to get the loan approved. Interest rates can be high. If you fail to make these payments on the loan the bank may seize assets of the enterprise
Describe leasing and give some advantages and disadvantages
Description: you rent a piece of equipment for a monthly fee but the equipment belongs to the leasing company
Advantages: short term is often cheaper than buying the equipment outright. after a fixed period of time the equipment is often updated to the latest model
Disadvantages: long term this can be expensive because the fees may come to more than the equipment would have cost
Describe mortgages and give some advantages and disadvantages
Description: a larger, longer term loan used to buy property and paid back at an agreed interest
Advantages: large sums of money can be borrowed to buy property for the business. Generally a much lower rate of interest than other forms of borrowing
Disadvantages: You need to provide detailed financial information to get the mortgage approved. If you fail to make payments on the loan the bank may seize property that was bought using the mortgage
