D - Sources of finance Flashcards
Internal sources of finance
money available to fund expenditure from within the business.
External sources of finance
money from outside the business
Name 3 Internal Sources of Finance?
Retained profit
Net current assets
Sale of assets
9 Types Of External Finance
Loans Crowd-funding Mortgages Venture capital Debt factoring Hire purchase Leasing Trade credit Grants
Retained Profit
What Is It
Advantages
Disadvantages
profit kept in the business to fund future spending
no interest charges, available immediately, no loss of ownership
amount available may be limited, reduces payments to shareholders, Once used it is not available for alternative purposes
Net Current Assets
What Is It
Advantages
Disadvantages
Day to day finance from cash, inventory (stock)
quick to arrange, no interest repayments or loss of ownership
cutting down on stock levels means the business may run out, demanding quicker payment from customers upsets them, delaying payments to suppliers upsets them.
Net Current Assets Formula
Net Current Assets = Current Assets - Current Liabilites
Selling Assets (Sale Of Asset)
What Is It
Advantages
Disadvantages
selling an item owned by the business to get immediate cash injection.
get rid of underused asset, no interest payments, no need to maintain asset
asset may not be sold at full value, use of asset lost, may need to rent a replacement
Owner’s Capital
What Is It
Advantages
Disadvantages
money invested in the business from the owner’s personal savings.
no interest payments or need to repay, commitment from owner
amount may be limited, owner has less money left, partners may disagree over amounts invested in the business.
Loans
What Is it
Advantages
Disadvantages
money borrowed from a financial institution for a set period of time.
Regular repayments make budgeting easy, ownership or control is not lost, loan can be secured against assets (eg. Machinery).
variable interest rate is charged on the amount borrowed, asset could be repossessed, interest must be paid even if the borrower makes no profit.
Crowd Funding
What Is It
Advantages
Disadvantages
use the internet to attract funding from individuals
Advantages:
1. get finance from a large number of investors (lots of small amounts), no interest is paid
2.investors will only be rewarded if the business is successfully sold on at a later date.
Disadvantages:
- Partial loss of ownership
- It may not raise sufficient investment to meet the proposal (plan may be scrapped)
Mortgages
What Is It
Advantages
Disadvantages
Long Time Loan +25 yrs to buy a house or to buy a business property.
Large amounts of finance can be raised and repaid over a long period of time
Ownership or control is not lost (no shares sold)
Interest rate is variable, property can be repossessed
Subject to good credit history, mortgage fees and survey of property needed
Venture Capital *Hint(DRAGONS DEN)
What Is It
Advantages
Disadvantages
investment from experienced entrepreneurs in return for a stake (share) in the business
Finance and advice and guidance from business professionals
They lend money to risky businesses that banks will refuse
Partial loss of ownership and control by giving them shares
Conflicts over decision-making (between owner and venture capital firm)
Venture capitalists may want to sell the business on to make money for themselves
Debt Factoring
What Is It
Advantages
Disadvantages
a finance company gives the business some cash for its unpaid customer invoices. It then collects the debts from the customers.
Improves cashflow into the business
Risk of bad debts is transferred to the finance company
Only receive about 85% of the amount owed, therefore reducing profits
Can upset customers who don’t like being chased by the finance company
Hire Purchasing
What Is It
Advantages
Disadvantages
buying an asset (eg. vehicle) in monthly instalments to spread the cost
No lump sum needed, easier to budget for monthly cost, can afford a better asset
Total cost will be higher overall, final payment gives you ownership of asset
