Finanace Flashcards
Explain what using internal sources of finance means
It means no interest or repayments
Explain entrepreneur
A person who sets up their own business
Name two internal finances and explain them
Own savings or family money used by smaller company or shop. Large companies sell shares
Retained profit, profit made by successful company and their money can be retained in the company instead of paying shareholders
When does a company use external sources of finance
When company cannot supply its own cash needs
Name nine external sources of finance
Grants Long term loan Sale and leaseback Medium term loan Hire purchase Leasing Creditors Unpaid expenses Bank overdraft
Explain grants as an external source of finance
Usually a small amount of cash required. Available from the EU, county enterprise board. Money to start a business
Explain long term loan as an external source of finance
Loan from the bank, long term loan used for capital items like premises and equipment/machinery. Requires collateral/security. Paid back over about 20 years. It is considered an expense source of finance because of interest on loan
Explain collateral/security
Something of value that the bank will take if you can’t pay back your loan
Explain sale and leaseback as an external source of finance
Company sells an asset and leases it back from the buyer. Company gets cash for selling but does not own the asset anymore
Explain medium term loan as an external source of finance
Loans that generally cover 1-5 years. Expensive source of finance . Ex. Car
Explain hire purchase as an external source of finance
Businesses can buy assets (ex. Car). They pay a deposit and a regular instalment. The business owns the asset once they pay the last installment
Explain leasing as an external source of finance
Similar to renting. Company never owns the asset. Lease it from a leasing company. Advantage is that company can get asset upgraded at the end of lease to a newer model.
Explain creditors as an external source of finance
Buying on credit. If you don’t pay for your purchases you are saving cash to use for other things. This is a short term source of finance. The cost of this source of finance is that there is no cash discount when buying.
Explain unpaid expenses as an external source of finance
Similar to not paying creditors. Not suitable source of finance for paying bills to electricity suppliers because they can cut your supply of you don’t pay
Explain bank overdraft as an external source of finance
Short term source of Finance where company lets you go into minus money. Agreed limit to how far into the minus money you can go. Interest is due on an overdraft amount. Should not be used long term and be paid back ASAP.
