Finance Flashcards
Define sources of finance
The options available to a business when seeking to raise funds to support future business actions
What does securing finance mean for a start up
Securing enough capital to set up the business
What does securing finance mean for an established business
Funding growth or implement a new strategy like relocation
What are the three types of internal sources of finance
Owners capital, retained profit and sale of assets
What are the six types of external sources of finance
Overdrafts, loans, venture capital, leasing, trade credit and debt factoring
What is owners capital
When a entrepreneur invests their own money in a business, how much the owner has invested
What are assets
The items owned by the business
What are creditors
People who the business owes money to
What are the benefits of owners capital
Do not have to repay, no interest, owners maintain control, risking own savings can be motivational, no lengthy processes
What are the disadvantages of owners capital
May only be a small amount available, threat to personal finances
What is retained profit
Profit kept within a business from the year to help finance future activities
What are the advantages of retained profit
Avoid interest, does not dilute ownership
What are the disadvantages of retained profit
Need sufficient profit, lowers dividends which frustrates shareholders, reduces security blanket
What are current assets
Items owned that will change in value in the short run (stock)
What are fixed assets
Assets that stay in the business for more than one year (machinery and vehicles)
What are the advantages of selling assets
No interest, turn obsolete assets into finance, immediate lump sum cash injection
What are the disadvantages of selling assets
Expensive in the long run if you need to lease the asset back, loss of use of the asset and future value, only a one off option
What is an overdraft
The facility to overspend on a current account up to an agreed sum
What are the advantages of an overdraft
Only borrowed when required, quick and easy to arrange, no charges for paying it off
What are the disadvantages of an overdraft
The bank can call it in at any time, only available from a current account, variable interest makes it hard to budget, may be secured against assets
What is a loan
A set amount of money provided for a specific purpose, to be repaid with interest over a set period of time
What are the advantages of loans
Quick and easy to secure, fixed interest rate makes budgeting easier, improved cashflow and the borrower retains ownership
What are the disadvantages of loans
Interest must be paid, can be viewed as a high risk business, must provide security, more expensive, penalty for early payment
What is share capital
Finance raised from the sale of shares
What are the advantages of share capital
Only need to pay dividends if a profit is made, possible to raise larger amounts, no interest
What are the disadvantages of share capital
Loss of ownership, potential risk of hostile takeovers and its a costly and complex process
What is venture capital
Investment from an established business into another business in return for a percentage equity in the business
What are the advantages of venture capital
Potential for large sums of money for investment, expertise to help the business, makes it easier to attract other sources of finance and provides capital for expansion
What are the disadvantages of venture capital
Its a long and complex process, requires expert financial projections, initially expensive with legal and accounting fees, partial loss of ownership, risk of conflict or perceived interference
What is leasing
Using an asset without buying it outright
What is trade credit
Paying suppliers a period of time after the goods or services have been received
What is debt factoring
Selling debt to a business that pays you 80 percent instantly and recovers the rest at a later date, you wont get all of the money back
What are the advantages of debt factoring
Receive a large amount of the debt instantly, good source of short term finance to address cash flow, reduces risk of bad debt
What are the disadvantages of debt factoring
Reduces profitability and may damage reputation
