Chpt.21 Business fiance: needs and sources Flashcards
define ‘Start-up capital’ [1]
the finance needed by a new business to pay for essential fixed and current assets before it can begin trading
define ‘Working capital’ [1]
the finance needed by a business to pay it’s day-to-day costs
define ‘Capital expenditure’ [1]
money spent on fixed assets which will last for more than one year
define ‘revenue expenditure’ [1]
money spent on day-to-day expenses which do not involve the purchase of a long-term asset (e.g. wages or rent)
define ‘internal finance’ [1]
internal finance is obtained from within the business itself
define ‘external finance’ [1]
external finance is obtained
define ‘micro-finance’ [1]
micro-finance is providing financial services – including small loans - to poor people not served by traditional banks
define ‘short-term source of finance’ [1]
short-term source of finance is finance that must be paid back within a year and includes: overdraft facility, trade credits, factoring
define ‘long-term source of finance’ [1]
long-term source of finance is funding obtained for a time frame exceeding one year in duration and includes: owners savings/share capital; loans; debentures; a mortgage; hire purchase or leasing; grants.
define ‘finance’ [1]
the money required in the business. Finance is needed to set up the business, expand it and increase working capital (day-to-day expenses)
What is retained profit and what are the advantages and disadvantages [1-2-3]
Retained profit is profit kept in the business after owners have been given their share of the profit. Firms can invest this profit back in the businesses
advantages:
- does not have to be repaid, unlike, a loan
- no interest has to be paid
disadvantages:
- a new business will not have the retained profit
- profits may be too low to finance
- keeping more profits to be used as capital will reduce owner’s share of profit and they may resist the decision
sources of finance in internal finance [4]
Retained profit,
Sale of existing assets,
Sale of inventories,
Owner’s savings
What is the sale of existing assets and what are the advantages and disadvantages? [1-2-2]
The sale of existing assets are assets that the business doesn’t need anymore (e.g. unused buildings or spare equipment can be sold)
advantages:
-makes better use of capital tied up in the business
-does not become debt for the business, unlike a loan
disadvantages:
-surplus assets will not be available with new businesses
-takes time to sell the asset and the expected amount may not be gained for the asset
What is the sale of inventories and what are the advantages and disadvantages? [1-1-1]
Sale of inventories is the sell of finished goods or unwanted components in inventory
advantages:
-reduces costs of inventory holding
disadvantages:
-if not enough inventory is kept, unexpected increase demand from customers cannot be fulfilled.
What are owners savings and what are the advantages and disadvantages [1-2-1]
Owners savings are for a sole trader and partnership, since they’re unincorporated (owners and business is not separated), any finance the owner directly invests from his own saving will be internal finance
advantages:
-will be available to the firm quickly
-no interest has to be paid
Disadvantages:
-increase the risk taken by the owners
sources of finance in external finance [7]
Issue of share, Bank loans, debenture issues, debt factoring, grants and subsidies, micro-financing, crowdfunding
What is issue of share and what the the adv and disadv [1-1-2]
Issue of share: only for limited companies.
Advantage:
-A permanent source of capital, no need to repay the money to shareholders
no interest has to be paid
Disadvantages:
-Dividends have to be paid to the shareholders
-If many shares are bought, the ownership of the business will change hands. (The ownership is decided by who has the highest percentage of shares in the company)
What are bank loans and what are their adv and disadv [1-3-4]
Bank loans are money borrowed from banks
advantages:
- quick to arrange a loan
- can be for varying lengths of time
-large companies can get very low rates of interest on their loans
disadvantages:
-need to pay interest on the loan periodicallt
-it has to be repaid after a specified length of time
-need to give the bank a collateral security
what are debenture issues and what are the adv and disadv [1-1-1]
debentures are long-term loan certificates issued by companies. Like shares, debentures will be issued, people will buy them and the business can raise money. acts as a loan
advantages:
- can be used to raise very long-term finance, e.g. 25yrs
disadvantages:
-interest has to be paid and it has to be repaid
what are grants and subsidies and what are their adv and disadv [1-1-1]
grants and subsidies are government agencies and other external sources can give the business a grant or subsidy
advantages:
- do not have to be repaid, is free
disadvantages:
-there are usually certain conditions to fulfil to get a grant. e.g. to locate in a particular under-developed area
what is micro-finance? [1]
special institutes set up in poorly-developed countries where financially-lacking people looking to start or expand small businesses can get small sums of money, provide all sorts of financial services
what is crowdfunding? [1]
raises capital by asking small funds from a large pool of people. (e.g. via kickstarter) these funds are voluntary ‘donations’ and don’t have to be return or paid a dividend
What are sources of short-term finance? [3]
Overdrafts, trade credits, debt factoring
