Finance Sources Flashcards
Give at least two examples of internal sources of finance for businesses.
At least two from:
- Retained profit
- Sale of assets
- Owners capital
Why may retained profit be a good source of internal finance?
- As it is a free source of finance that does not incur interest.
Why may retained profit be a bad source of internal finance?
- Shareholders may wish to receive their money back in the form of a dividend.
Why may sales of assets be a good source of internal finance?
- It frees up monetary value to be used in other areas of the business.
Why might sales of assets be a bad source of internal finance?
- It causes the business to loose the benefit of having the assets i.e. no longer owning a delivery vehicle.
Is retained profit a long or short term method of internal finance?
- Long term
Is sales of assets a short or long term method of internal finance?
- Long term
Why might owners capital be a good source of internal finance?
- It is a free source of finance that does not incur interest.
Why might owners capital be a bad source of internal finance?
- Owners could loose their personal investment into the business.
Is owners capital a long or short term method of internal finance?
- Long term
Give at least three examples of external sources of finance for businesses.
At least three from:
- Overdrafts
- Debt factoring
- Bank loan
- Mortgage
- Venture capital
- Share capital
- Crowdfunding
What is an overdraft?
Where the bank allows a firm to take out more money than is in its bank account.
Is an overdraft a long or short term method of external finance?
- Short term
Why might overdrafts be a good source of external finance for businesses?
- It is a flexible way to fund working capital and acts as a buffer for day to day expenses.
What might overdrafts be a bad source of external finance for business?
- The bank pay ask for repayment at any time and interest rates are high.
What is debt factoring?
Where a firm sells its debt to a third party factor.
Is debt factoring a long or short term source of external finance?
- Short term
Why might debt factoring be a good source of external finance for a business?
- It allows businesses to receive cash immediately.
Why might debt factoring be a bad source of finance for a business?
- Customers could be aware if debts are factored and loose faith in the company.
Is a bank loan a long or short term source of finance?
Long term
Why may bank loans be a good source of external finance for a business?
- the loan can be negotiated to meet the requirements of the business.
- the loan is paid back over a fixed amount of term
- the bank or loan provider cannot ask for the money repayments before they are due.
Why may bank loans be a bad source of external finance for businesses?
- The business has to pay interest on the loan and may have to offer collateral in order to secure it.
What is a mortgage?
- A special type of loan which allows for the purchase of property.
Why might a mortgage be a good source of external finance for businesses?
Because it is ideal for long term investments.
