External Finance (Methods Of Finance) Flashcards
What are the methods of finance
Venture capital
Overdrafts
Leasing
Trade credit
Share capital
Loans
Grants
Mortgages
Debentures
Loans
An agreement where amount borrowed must be returned after a fixed period of time
What are the 3 types of loans
Bank loans
Mortgages
Debentures
What is a disadvantage of loans?
Tend to be inflexible , interest will be added to total
- Bank loans
Unsecured loans, lender has no protection
What are the advantages and disadvantages of bank loans
Advantage: - can be used for long period of time
Disadvantage:
- lender has no protection, bank loans have probably been diminished due to high risk they carry in banks
- High interest
What are mortgages ?
Secured loans, borrower has to provide an asset as collateral (guarantee) to support the loan
Long term loans
What are the advantages and disadvantages of mortgages?
Advantage : Usually cheaper than unsecured loans as they’re less risk
Disadvantage : inflexible
What are debentures?
Long term business debt not secured by collateral
The holder of a debenture is a creditor (bank, personnel, other business) of a company. Not an owner.
What are the advantages and disadvantages of debentures
Advantage : owners are entitled to fixed rate of return
Disadvantage: no voting rights, must also be repaid on a set date when term of loan ends
What is share capital
Money gained from selling shares/when you buy a share
What is issued share capital?
Money gained from selling shares
What is authorized share capital?
Maximum amount share holders want to raise
What is a capital gain?
Made by selling shares at a higher amount than it was originally bought
What are the 3 types of share capital ?
Preference
Ordinary
Deferred
What is a preference share
Shareholders earn fixed rate of return when a dividend is declared
What is an ordinary share?
Riskiest type due to no guaranteed dividend
Size of dividend depends on:
1. How much profit is made
2. How much directors choose to retain in business
What is deferred shares ?
Only receive a dividend after ordinary shareholders have been paid minimum amount
What’s a disadvantage of deferred shares?
Dividend not always declared, share capital has administrative cost to sell shares in market
What is venture capital?
Businesses may turn to venture capital after being refused by other outsourcers eg. Business angels
Venture capitalists are specialists in the provision of funds for small businesses. They prefer to take a stake in the business as they have some control and get a share in the profit
What are the advantages of venture capitalists?
Can give experienced advice
Expect high growth potential
What are the disadvantages of venture capitalists
Sharing profits with owner
Finding suitable angel is difficult
What is a bank overdraft ?
Business can spend more money than what’s in its account
Bank and other businesses will agree on overdraft limit and interest is only charged when acccount is overdrawn
What are the advantages and disadvantages of bank overdraft?
Advantage: provides a flexible source + funding to a business
Disadvantage: bank has a legal right to call in money owed at any time —> will happen if they suspect business is struggling and is unlikely to pay what is owed
