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Business - 003 Personal and Business Finance > D.1 Sources of Business Finance > Flashcards

D.1 Sources of Business Finance Flashcards

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1
Q

What is capital income?

A

A large amount of income that is used for a large purchase. The large purchase will be an item that the business needs and will not aim to sell e.g. a piece of equipment, machinery or vehicle.

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2
Q

What is capital expenditure?

A

Money that is spent on a large purchase. The item you buy is not to be sold by the business as they will need it to run the business.

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3
Q

What is revenue income?

A

Income that is gained from day to day sources e.g. selling your stock

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4
Q

What is revenue expenditure?

A

Money that is spent on day to day items to run the business such as paying gas, electricity, rent or buying stock.

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5
Q

What are the three internal sources of finance?

A
  1. Retained profit
  2. Net current assets
  3. Sale of assets
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6
Q

What is retained profit?

A

Retained profit is profit that has been made by the business in previous years that is then reinvested back into the company.

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7
Q

What is the equation for net current assets?

A

Current assets – current liabilities = net current assets

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8
Q

What is sale of assets?

A

Anasset saleoccurs when a company sells some or all of its actualassets, either tangible or intangible.

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9
Q

What is net current assets?

A

Net current assets is the day to day money that the business has that is readily available.

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10
Q

Give two advantages of retained profit

A
  1. Free, no interest charged
  2. Doesn’t need to be repaid
  3. Instant access
  4. Doesn’t dilute the ownership
  5. Spend within your means
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11
Q

Give two disadvantages of retained profit

A
  1. Amount may be limited
  2. May take too long to save
  3. Once you’ve spent it, it is gone
  4. Shareholders may prefer dividend
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12
Q

Give an advantage of net current assets

A

Encourages the business to manage cash flow effectively

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13
Q

Give two disadvantages of net current assets

A
  1. Can put pressure on customers as shorter credit terms are offered and this negatively affects relationships with suppliers if longer credit terms are negotiated
  2. Lower stock holdings can affect the firm’s ability to meet customer needs
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14
Q

Give two advantages of sale of assets

A
  1. No interest charges
  2. Reduces capital tied up in assets, releasing it for other purposes
  3. Can mean disposing of an asset no longer of use to the business
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15
Q

Give two disadvantages of sale of assets

A
  1. It is likely that the amount received is not truly a reflection of the value of the asset
  2. Can increase costs in the long run if an asset needs to be leased back
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16
Q

What are external sources of finance?

A

The places where finance can be raised from outside the business.

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17
Q

Name 13 external sources of finance

A
  1. Owners capital
  2. Loans
  3. Crowd-funding
  4. Mortgages
  5. Venture capital
  6. Debt factoring
  7. Hire purchase
  8. Leasing
  9. Trade credit
  10. Grants
  11. Donations
  12. Peer to peer lending
  13. Invoice discounting
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18
Q

What is owners capital?

A

This is the money invested in the business from the owner’s personal savings.

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19
Q

Give two advantages of owners capital

A
  1. No interest payments or need to repay

2. High level of commitment from the owner

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20
Q

Give two disadvantages of owners capital

A
  1. Amount available is likely to be limited

2. If there is more than one owner this could cause friction if everyone is not able to contribute the same amount

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21
Q

What are loans?

A

This is money borrowed from a financial institution normally for a set period of time and for a specific purpose. Interest will be payable on the loan.

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22
Q

Give two advantages of loans

A
  1. Regular pre-agreed repayments make planning and budgeting relatively easy
  2. Ownership or control is not lost
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23
Q

Give two disadvantages of loans

A
  1. Interest is charged on the amount borrowed
  2. Interest rates can fluctuate
  3. Often secured against an asset which can be seized if repayments are missed
  4. Interest has to be paid regardless of whether a profit is being made
24
Q

What is crowd funding?

A

This involves attracting investment from a large number of speculative investors many of whom may invest relatively small amounts. If cumulatively this matches the required amount then the investments are collected together. Normally makes use of the internet to attract investors.

25
Q

Give two advantages of crowd funding

A
  1. Offers the ability to raise finance from a large number of investors
  2. No interest is paid as investors will only be rewarded if the business is successfully sold on at a later date
26
Q

Give two disadvantages of crowd funding

A
  1. Partial loss of ownership

2. No guarantee that the crowd fund will attract sufficient investment to meet the proposal

27
Q

What are mortgages?

A

These are long-term loans, normally around 25 years, which are secured against a specific asset, for example a building. Interest will be payable on the mortgage.

28
Q

Give two advantages of mortgages

A
  1. Large amounts of finance can be raised and repaid over a prolonged period of time
  2. Ownership or control is not lost
29
Q

Give two disadvantages of mortgages

A
  1. Interest is charged on the amount borrowed
  2. Interest rates can fluctuate
  3. Often secured against an asset which can be seized if repayments are missed
  4. Interest has to be paid regardless of whether a profit is being made
  5. Not suitable for small amounts or as a short term source of finance
30
Q

What is venture capital?

A

This is investment from an experienced entrepreneur in return for a stake (equity) in the business.

31
Q

Give two advantages of venture capital

A
  1. Finance is provided by a business professional who will often offer advice and mentoring alongside the investment
  2. Venture capitalists are often risk takers and may see the potential in a high risk investment that other investors including banks may not be willing to invest in
32
Q

Give two disadvantages of venture capital

A
  1. Partial loss of ownership and control
  2. Conflict can arise between the entrepreneur and venture capitalist regarding the direction and day-to-day running of the business
33
Q

What is debt factoring?

A

This involves the selling on of a business’s debts to a third party in order to receive the cash quickly. The factor company pays the business a percentage of the money owed and takes on the responsibility to chase the debts which need to be repaid.

34
Q

Give two advantages of debt factoring

A
  1. Speeds up the flow of cash into the business from debts

2. The factor company takes on the risk of bad debt

35
Q

Give two disadvantages of debt factoring

A
  1. Only receive a percentage of the amount owed, therefore reducing profits
  2. Can give the wrong impression or alienate customers
36
Q

What is hire purchase?

A

This involves paying to use an asset in instalments to spread the cost over its useful life and hence provide a source of finance. The asset will remain the property of the seller until the final instalment has been paid.

37
Q

Give two advantages of hire purchase

A
  1. Avoids the need to pay a lump sum for the use of an asset
  2. Regular instalments make planning and budgeting easier
  3. Spreads the cost of an asset over its useful life
38
Q

Give two disadvantages of hire purchase

A
  1. Overall amount paid for the use of an asset is likely to be higher than if purchased outright
  2. Only really suitable for relatively low cost assets, e.g. vehicles and not premises
39
Q

What is leasing?

A

This involves paying to use an asset in instalments to spread the cost over its useful life and hence providing a source of finance. Ownership of the asset stays with the supplier throughout the length of the lease agreement.

40
Q

Give two advantages of leasing

A
  1. Responsibility for maintaining and repairing the asset stays with the supplier
  2. Spreads the cost of an asset over its life to avoid paying a lump sun up front
41
Q

Give two disadvantages of leasing

A
  1. Overall amount paid for the use of an asset is likely to be higher than if purchased outright
  2. Never actually own the asset and therefore payments are ongoing
42
Q

What is trade credit?

A

This is a period of time offered by suppliers to allow the customer to purchase a good or service now and pay at a later date, for example 30 days after purchase.

43
Q

Give two advantages of trade credit

A
  1. Delays the need to pay for goods and services purchased, therefore aiding cash flow
  2. No loss of ownership or control
44
Q

Give two disadvantages of trade credit

A
  1. Potential loss of discounts offered for cash payments

2. Only suitable as a short term source of finance

45
Q

What are grants?

A

This is a lump sum provided to a business by the government or another organisation to be used for a specific purpose. For example, it could be used to provide employment in a deprived area or invest in the research and development of an environmentally friendly alternative to fossil fuels.

46
Q

Give two advantages of grants

A
  1. No need to repay and no interest charges

2. No loss of ownership or control

47
Q

Give two disadvantages of grants

A
  1. Often require a lengthy application process

2. Might only be awarded if certain conditions are met affecting the way the business operates on a day-to-day basis

48
Q

What are donations?

A

These are sums of money given voluntarily to a charity or social enterprise.

49
Q

Give two advantages of donations

A
  1. No need to repay and no interest charges

2. No loss of ownership or control

50
Q

Give two disadvantages of donations

A
  1. Likely to be small amounts only

2. Unpredictable

51
Q

What is peer to peer lending?

A

This involves one business person lending money to another business person in return for interest payments.

52
Q

Give two advantages of peer to peer lending

A
  1. Interest rates can be lower than lending from more traditional financial institutions
  2. Fixed rate of interest can be agreed making it easier to plan and budget
53
Q

Give a disadvantage of peer to peer lending

A

Amounts available may be limited and provided for a short period of time only

54
Q

What is invoice discounting?

A

These are reductions offered to customers making a product or service cheaper, often applied as a percentage.

55
Q

Give two advantages of invoice discounting

A
  1. No need to repay and no interest charges
  2. No loss of ownership or control
  3. Reduces costs to the business so increases profit
56
Q

Give a disadvantage of invoice discounting

A

Often only available if purchases are paid in cash which affects cash flow

Business - 003 Personal and Business Finance (16 decks)

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