D1: Sources of Finance Flashcards
Finance definition
providing funding for a person or enterprise. This is done using internal or external sources.
source of finance definition
where the money comes from
where does a business need finance
start a business
run the business
expand the business
3 internal sources of finance
retained profit
net current assets
sale of assets
8 external sources of finance
owners capital
loans
crowd-funding
venture capital
mortgages
debt factoring
hire purchase
leasing
owners capital definition
money put into the business by the owner
owners capital advantages
No interest payments or need to repay
High level of commitment from the owner
owners capital disadvantages
amount available is likely to me limited
if there is more than one owner this could cause friction if everyone is not able to contribute the same amount
loans definition
a set amount of money borrowed for a specific purpose, to be repaid with interest, over a set period.
loans advantages
borrow large amounts
fixed interest rates firms to budget
improved cash flow
the borrower retains ownership of the company
loans disadvantages
you must repay
interest must be paid regardless of financial performance
a firm normally provides security known as collateral
often more expensive than other forms of finance
can be charged a penalty for early payment
crowd-funding definition
raising finance from many people investing different, often, small, amounts of money.
crowd-funding definition
raising finance from many people investing different, often, small, amounts of money.
crowd-funding advantages
Pitching a business through online platform can be a valuable form of marketing and invite investors to give feedback.
a good way to test the publics reaction to produce – if people are keen to invest it is a good sign that your idea could work well in the market.
Its an alternative finance finance option if you have struggled to get bank loans or traditional funding.
crowd-funding disadvantages
A lot of work is needed in building up interest before the project launches – lots of money and / or time may be required.
If you don’t reach your funding target, any finance that has been pledged will usually be returned to your investors and you will receive nothing.
If you haven’t protected your business idea with a patent or copyright, someone may see it on crowdfunding site and steal your concept.
You must pay out rewards to investors
venture capital definition
investment from an established business into another business in return for a percentage equity in the company. AKA – private equity finance
venture capital advantages
Potential for large sums of money for investment
Expertise to help the business
Makes it easier to attract other sources of finance
Provides the required capital for expansion
venture capital disadvantages
A long and complex process
Expert financial projections are likely to be required
Initially expensive for the firm
Partial loss of ownership
Risk of conflict or perceived interference
mortgages definition
a long term loan to fund the purchase of a property.
mortgages advantages
Makes it possible to buy items such as a property which would not be feasible otherwise.
Spreads the cost of the property over a long period of time.
Changes can be made to find the best deals on a semi-regular basis depending upon mortgage chosen. (e.g. – fixed for variable rate mortgage).
mortgages disadvantages
Payments may be subject to change e.g. if interest rates change
You have to apply and may not receive a mortgage if credit rating is poor
Normally require a substantial deposit e.g. 20% of house value
Risk of repossession if default on payments
debt factoring definition
the process of selling the debts owed to a business to a financial institution.
debt factoring advantages
Receives a large amount of the debt immediately
Good source of short-term finance to address cash flow problems
Debts are chased by experts saving managers’ time
Reduces the risk of bad debts
debt factoring disadvantages
Reduces profitability of the firm as a result of the fee paid to the financial institution
May damage the reputation of the firm as they are seen to need short-term finance
hire purchase definition
allows a business to enjoy the use of an asset whilst paying for it in regular instalments. The asset will eventually be owned by the business.
hire purchase advantages
Avoids one off lump sum payments
allows you to purchase something that you otherwise wouldn’t if you had to pay in lump sum
hire purchase disadvantages
Interest will normally be charged on top pf the cost of the asset
leasing definition
allows a business to benefit from the use of an asset without owning it or buying it outright. The business pays a set amount in installments to lease/rent the asset to predetermined period.
leasing advantages
Avoids the need to pay a lump sum of money to buy the asset outright
The lease company is responsible for any repairs and maintenance
At the end of the lease period the business may start a new lease agreement for the last model
leasing disadvantages
May be more costly in the long run paying monthly instalments overtime is be more than the asset is worth
A good credit rating is needed to ensure that monthly repayments can be made
