D1 - External Sources of Business Finance Flashcards
Explain and evaluate using owner’s capital as a source of finance.
It’s the owner’s personal finances used to finance the business.
+ No interest or repayment schedules & no loss of ownership
- Limited amount & can cause friction if owners invest differing amounts
Explain and evaluate using loans as a source of finance.
It’s the money lent to the business that is paid off with fixed interest rates over an agreed period.
+ Easy to budget as repayments are pre-arranged & no loss of ownership
- Interest charged & often secured against an asset
Explain and evaluate using crowd-funding as a source of finance.
It involves many people investing small amounts of money in a business, usually online.
+ No interest paid & finance is received from a number of investors
- Partial loss of ownership & no guarantee of enough investment
Explain and evaluate using mortgages as a source of finance.
It’s a long-term source of finance borrowed from the bank that is secured against a property and paid back in instalments.
+ No loss of ownership & large amounts can be acquired and paid back over a long time period
- Interest charged & not suitable for short-term or small amounts
Explain and evaluate using venture capital as a source of finance.
It’s the money invested by an individual or group, willing to take the risk of funding a new business in exchange for an agreed share of the profits.
+ Finance is available along with professional advice/mentoring & capitalists are usually high risk high reward people
- Partial loss of ownership & possible conflict between the owner and venture capitalist
Explain and evaluate using debt factoring as a source of finance.
It’s when a business sells their invoices to a third party at a discounted price in order to bypass the hefty waiting times which are associated with invoice payments.
+ Speeds up cash flow & another company takes on debt
- Business will only receive a % of the amount owed & dealing with a new company can upset loyal customers
Explain and evaluate using hire purchase as a source of finance.
It’s when a deposit is paid and the remaining amount is paid in monthly instalments over a set period, not owning the item until all payments are made.
+ Avoids paying a lump sum for an asset & easy planning and budgeting
- Likely to cost more than buying the asset outright & only suitable for low cost assets (e.g. vehicles, not land)
Explain and evaluate using leasing as a source of finance.
It’s a way of renting an asset that the business requires where monthly payments are made, and the leasing company is responsible for the provision and upkeep of the leased item.
+ Asset responsibility remains with the supplier & spreads the asset cost over its lifespan
- Likely to cost more than buying outright & never actually own the asset so the payments are ongoing
Explain and evaluate using trade credit as a source of finance.
It must be agreed with a supplier and form a credit agreement with them. This allows a business to obtain raw materials and stock but pay for them later.
The main characteristics are:
* credit limit
* credit period
* frequency of payment
* method of payment
* retrospective discounts
+ Helps with cash flows due to delayed payments & no loss of ownership and control
- Failure to meet payment schedules can result in major penalties according to the negotiated terms and damage the client’s reputation and relationship with the supplier
Explain and evaluate using grants as a source of finance.
It’s a fixed amount of money usually awarded by the government, EU or charitable organisations, given to a business on the condition that they meet certain criteria such as providing jobs in areas of high unemployment.
+ Doesn’t need to be repaid & no loss of ownership or control
- Have to meet certain conditions & takes a long time to apply
Explain and evaluate using donations as a source of finance.
They are relied upon for the continual running and day to day upkeep of non-profit organisations.
+ No need to repay & no loss of ownership or control
- Not reliable & usually received in small amounts
Explain and evaluate using peer-to-peer lending as a source of finance.
It’s a way for people to lend money to individuals or businesses where, in return, the lender receives interest on top of the amount lent out.
+ Interest rates can be lower than a traditional bank & some platforms allow you to pay your P2P loan off early or make an overpayment with no penalties
- Amount available to borrow may be limited & short term source
Explain and evaluate using invoice discounting as a source of finance.
It is a form of short-term borrowing against outstanding invoices, used to improve a company’s working capital and cash flow position. It gives access to the money in unpaid customer invoices much faster by taking out a short-term loan from an invoice discounting company. Once payment is received, the loan is paid back.
+ Speeds up the working capital & no need to inform clients
- Often only available if purchases are paid in cash & negatively impacts cash flow
