(D1) Sources of Finance Flashcards
Types of Finance
- Internal Finance
- External Finance
What is internal finance?
Money that comes from within the business
Types of Internal Finance
- Retained Profit
- Net Current Assets
- Sale of Assets
What is retained profit?
The profits used to reinvest back in the business
Advantages of Retained Profit
Does not have to be repaid and no interest payable
Disadvantages of Retained Profit
Only available to businesses that make enough profit
What is net current assets?
The money immediately available to the business used to cover day to day expenditure
Advantages of Net Current Assets
- A quick way of raising money
- Selling of these assets reduced the costs of keeping them
Disadvantages of Net Current Assets
May have to accept a lower price for inventory sold
What is the sale of assets?
Assets can be sold to give the business cash
Advantages of Sale of Assets
A good way of raising funds from assets that are no longer needed
Disadvantages of Sale of Assets
- Not all business have enough assets to sell
- Some assets take to long to sell
- The assets may be sold below their actual value
What is external finance?
Money that comes from outside the business
Types of External Finance
- Owner’s Capital
- Loans
- Hire Purchase
- Crowd-Funding
- Debt Factoring
- Venture Capital
- Mortgage
- Leasing
- Trade Credit
- Grants
- Donations
- Invoice Discounting
- Peer-to-Peer Lending
What is debt factoring?
Selling the business’s invoice(debt) to a third party
What is the advantage of debt factoring?
Debt doesn’t have to be chased up anymore
What is the disadvantage of debt factoring?
The invoices (debt) have to be sold at a lower price than the debt owed
What is venture capital?
Funds from an investor in return for a share of the business
What is leasing?
When a business rents out an asset without paying a large sum
What are the disadvantages of leasing?
Can be expensive and not a good idea for the long term
What is trade credit?
A customer can purchase a good and pay the supplier at a later date
What is the disadvantage of trade credit?
Risk of late payments
What is a grant?
Government payments to businesses given with the conditions such as new jobs
What is an advantage of grants?
Do not need to be paid back
What is invoice discounting?
When a business buys debt ?????
What is peer-to-peer lending?
Investors use organisations to match them with business to invest in
What is the advantage of peer-to-peer lending?
Useful for businesses that cannot secure investment
What is the disadvantage of peer-to-peer lending?
There is a fee
