Difficult concepts- equations, sources of finance Flashcards
What is internal sources of finance and external sources of finance?
1) Internal sources would be found inside the business, so for example selling assets which are no longer need or using retained profits.
2) External sources of finance can be found outside the business such as banks and creditors, loan or share capital.
Give 3 short term sources of finance?
1) Overdraft: where a bank will allow a business to take out more money than in its bank account.
2) Trade credits- where suppliers will deliver goods and would be willing to wait a number of dates for the payment.
3) Factoring- where firms will send their invoices to a factor such as the bank and do this for cash right away rather then waiting.
Give 6 long term sources of finance?
1) Owners who invest money could use their savings or for a group of shareholders, they could invest funding known as the share capital.
2) Loans from banks or family or friends.
3) A mortgage, a special type of loan for buying a property where monthly payments are spread over a number of years.
4) Hire, purchase, or leasing(most appropriate for machinery& equipment)
5) Grants from charities or gov
6) Venture capital
7) Crowdfunding
What are the advantages and disadvantages of:
1) Personal sources,
1)Personal sources-:
adv- owner remains in control, its flexible, builds a personal commitment.
Diadv- may be limited, oppourtunity cost, entrepreneurs fund at risk.
What are the advantages and disadvantages of:
3)Bank Overdraft.
3)Bank overdraft
adv- flexible short term use,
only used when needed.
Disadv-Expensive(high rate of interest)
-Repayable to bank on demand.
What are the advantages and disadvantages of:
2) Retained Profit.
Retained Profit- adv-
- Cheaper than other sources of finance such as bank loans
- It is quicker than using other sources of finance
- Does not involve diluting ownership
- Involves limited/no risk
- Other sources of finance may not be available/too risky.
Disadv:
- shareholders may want a dividend
- an opportunity cost, danger of hoarding profit.
- Does the company have enough retained profit?
- The retained profits could be put to better use elsewhere. E.gadvertising
- Shareholders may want higher dividends instead
- Retained profit takes time to accumulate.
How is leasing different to hire? What is the disadvantages of leasing?
Leasing is renting a piece of machinery or equipment and it pays a regular amount of income for a period of time, but the equipment belongs to the leasing company.
Disadv- can become expensive in the long run, because the leasing company charges fees which makes the total cost greater than the original cost.
Hire- business hire equipment over a period of time making fixed regular payments. Once payments have finished, they own the piece of equipment
What is trade credit?
Suppliers provide a business with the goods and allow the customer to pay at a later date, usually 30 days. It’s effectively a free source of finance.
What are grants?
a sum of money given by an organization, especially a government, for a particular purpose.
What is venture capital?
raising capital from investors where the investors may want shares, typically a new or expanding business, to fund a new business idea.
How is bank loan different to bank overdraft?
Bank overdraft is a short term source of finance where the bank lets the business ‘owe it money’, in return for charging at a high rate of interest whereas bank loan is a long-term source of finance where the bank states a fixed period of time to prove the loan, the rate of interest, and the timing and amount of repayments-> requires security.
What is crowd funding?
where small amounts of money are given by a large number of people towards a business or a project
What is stock market floatation?
The process of changing a business to a public limited company and allows sell shares to the public through a stock exchange.
