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
