External sources of finance Flashcards
What are the 4 sources?
- Owners Capital
- Share Capital
- Venture Capital
- Trade Credit
What is Owners Capital?
State 2 pros and cons.
How much the owner has invested into the business.
Shows the proportion of the business’s assets that are owned by the business owner rather than creditors (owe business money).
Pros - Do not have to pay money back as it’s personal savings. No interest charges. Owners mainly in control.
Cons - May only be limited amount. Threat to family and personal life.
What is Share Capital?
State 2 pros and cons.
Finances raised from sales of shares. Form of equity capital, shareholder becomes a part of the business and will be rewarded for their investment by the payment of dividends. Increase in share price results in increasing values of their shares. (Only an option for LTD’s or PLC’s).
Pros - No interest repayments. More money in the business to spend on improvements and growth.
Cons - issuing shares is complex and costly process. Loss of ownership as shareholders are part-owners. potential risk of loss of control for a PLC with a threat of hostile take-overs.
What is Venture Capital?
State 2 pros and cons.
Investment from an established business into another business in return for a percentage equity in the business.
Pros - Expertise help in the business. Makes it easier to attract other source of finance. Provides required capital for expansion.
Cons - Long and complex process. Initially expensive for the firm. Patronising for business owner if they have to keep following someone else’s orders or advice.
What is Trade Credit?
State a pro and con.
Paying suppliers over a period of time after the goods or services have been received. In effect, the supplier is providing the business with finance for the period of the trade credit.
Pro - Money can be paid from revenue.
Con - Business may lose out on discounts being offered for immediate or quick payments.
