Finance - Sources of Finance Flashcards
- Describe Bank Overdraft as a source of finance
- Give one advantage and disadvantage of this
Business can overdraw an amount of money from their account (-ve bank balance)
ADVANTAGES:
* Easy to set up → quick access to finance
* Is paid back in installments → easy for the business to budget
DISADVANTAGES:
* Must be paid back fast → can get expensive due to high interest rates
AVALIABLE TO: Private Sector
- Describe Government Grant as a source of finance
- Give one advantage and disadvantage of this
Finance given from the government to encourage entrepreneurs to start a company. Expert knowledge is also given
ADVANTAGES:
* No need to repay it → saves money
DISADVANTAGES:
* Criteria needs to be met → hard to get
AVALIABLE TO: Private Sector, Third Sector
- Describe Retained profits as a source of finance
- Give one advantage and disadvantage of this
Business saves a portion of profits to reinvest back into the business.
ADVANTAGES:
* Profit belongs to the company → Owner is in control
DISADVANTAGES:
* Business may not make profit sometimes → risky to rely on it
* Can run out quickly
AVALIABLE TO: Private Sector
- Describe Trade Credit as a source of finance
- Give one advantage and disadvantage of this
Business can purchase goods from suppliers with a delayed payment (buy now pay later)
ADVANTAGES:
* Can sell goods using materials not yet paid for → improves cash flow
DISADVANTAGES:
* Limited time for repayment → could be charged if not paid in time
* Businesses at risk of getting a poor credit rating → may be refused credit in the future
AVALIABLE TO: Private Sector
- Describe Leasing as a source of finance
- Give one advantage and disadvantage of this
Equipment is rented from another company, and a monthly fee is paid.
ADVANTAGES:
* Leasing company repairs the equipment → saves costs
* Good for businesses with limited finance → doesn’t require a large initial payment
DISADVANTAGES:
* Asset is never owned by the business
* Monthly costs may be more than asset price → cheaper to buy asset in full
AVALIABLE TO: Private Sector
- Describe Hire Purchase as a source of finance
- Give one advantage and disadvantage of this
Allows a business to buy an asset and pay it back over a period of time. An initial deposit is required followed by monthly payments.
ADVANTAGES:
* Allows the business to purchase expensive machinery with only an initial deposit.
DISADVANTAGES:
* Business doesn’t own asset until final monthly payment
* Interest must be paid → Makes asset more expensive in the long run
AVALIABLE TO: Private Sector
- Describe Owner’s savings as a source of finance
- Give one advantage and disadvantage of this
Owners use their savings to invest into their business
ADVANTAGES:
* Owner has complete control
* Reduces amount which needs to be borrowed → cheaper
DISADVANTAGES:
* Risky → savings could be small and not last long
* Owners with unlimited liability at risk of losing savings
AVALIABLE TO: Private Sector
- Describe Loans from family/friends as a source of finance
- Give one advantage and disadvantage of this
Owner can borrow money from family or friends
ADVANTAGES:
* Owner may not have to pay any interest on the loan
DISADVANTAGES:
* Could lead to arguments between family and friends
AVALIABLE TO: Sole Trader, Social Enterprise
- Describe Bank loan as a source of finance
- Give one advantage and disadvantage of this
Business is lent money over a set period of time. This is paid back in monthly installments
ADVANTAGES:
* Payments are made in regular fixed instalments → easier to budget
DISADVANTAGES:
* Interest is paid along with the amount borrowed → expensive
* Small businesses have higher interest rates → expensive
AVALIABLE TO: Private Sector, Social Enterprise
- Describe Share issue as a source of finance
- Give one advantage and disadvantage of this
Selling more shares to raise capital
ADVANTAGES:
* Large sums can be raised
* No need to repay
DISADVANTAGES:
* More shareholders = more dividends to pay
* May result in a loss of control
AVALIABLE TO: LTDs
- Describe Mortgage as a source of finance
- Give one advantage and disadvantage of this
Bank loan used to purchase property only. Paid back in monthly installments.
ADVANTAGES:
* Large sums can be borrowed over a long period
* Fixed monthly payments → easier for budgeting
DISADVANTAGES:
* Interest must be paid too → rates can be high, expensive.
AVALIABLE TO: Private Sector
- Describe Debt Factoring as a source of finance
- Give one advantage and disadvantage of this
Businesses sells their debt to a debt factoring company to chase customers up.
ADVANTAGES:
* Business can recoup some debt they are owed
* They don’t have to chase up debts themselves → saves time
DISADVANTAGES:
* Business doesn’t receive all the debt they are owed
AVALIABLE TO: Private Sector
