Finance - Sources of Finance Flashcards
What are the types of short-term sources of finance ?
Bank Overdraft
Government grant
Retained profit
Trade credit
Leasing
Hire purchase
What is a bank overdraft ?
allows a business to over draw an amount of money from their bank account
What are the advantages of a bank overdraft ?
- Easy to set up
- Quick to access finance
What are the disadvantages of a bank overdraft ?
- must be paid back quickly or can be expensive due to high interest rates
Who are Bank overdrafts available to ?
Soletrader
Partnership
Private limited company
What is a government grant ?
Given to encourage entrepreneurs to start a new business or open a business in a particular area by offering expert knowledge as well as financial assistance
What are the advantages of a Government grant ?
- Provides finance which doesn’t need to be repaid
What are the disadvantages of a Government grant ?
- one-off payment
- you need to meet the criteria
Who is a Government grant available to ?
Soletrader
Partnership
Private limited company
Social enterprise
What is retained profit ?
A business saves a portion of its profits and reinvests back into the company
What are the advantages of retained profit ?
- profit belongs to the company, so owner is in control
What are the disadvantages of retained profit ?
- May run out of retained profits quickly
- Relying on profits is risky, as some months a business may not make profits
Who is retained profit available to ?
Soletrader
Partnership
Private limited company
Social enterprise
What is trade credit ?
This is when a business can purchase goods from suppliers with a delayed payment (buy now pay later)
What are the advantaged of trade credit ?
- can sell goods using materials not yet payed for, improving cash flow
What are the disadvantages of trade credit ?
- If a business doesn’t pay on time, there may be a charge
- If this happens repeatedly, the business may get a ‘poor credit rating’ and be refused credit in the future
who is trade credit available to ?
Private sector
What is leasing ?
A business can lease vehicles or machinery from other companies. They pay a monthly fee, and the leasing company takes care of the maintenance
What are the advantages of leasing ?
- The leasing company will repair and maintain the machinery, which saves the business money
- if a business has limited finance this doesn’t require a large initial payment
What are the disadvantages of Leasing ?
- The business will never own the asset
- in the long run the monthly cost will total to more than it would have cost to by the asset out right
Who is leasing available to ?
Soletrader
Partnership
Private limited company
What is hire purchase ?
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
What are the advantages of hire purchase ?
- allows a business to buy expensive machinery with only an initial deposit
What are the disadvantages of Hire purchase ?
- The business does not own the asset until the final month
- interest also must be paid which can make the asset more expensive in the long run
Who is Hire purchase available to ?
Private sector
What are the long term sources of finance ?
Owners finance
loan from family/ friends
bank loan
share issue
mortgage
debt factoring
What is owner finance ?
owners use their own savings to invest into the business
What are the advantages of owner finance ?
- The owner has complete control
- reduces the amount which needs to be borrowed
What are the disadvantages of owner finance ?
- Savings could be small and may not last long
- Owners with unlimited liability would risk losing their savings
Who is owner finance available to ?
Soletrader
Partnership
Social enterprise
What is loan from family and friends ?
A business owner can borrow money from family and friends
What are the advantages of loans from family and friends ?
- The owner may not have to pay an interest on the loan
What are the disadvantages of loans from family and friends ?
- This could lead to arguments or disagreements between family and friends
Who is loans from family and friends available to ?
Soletrader
Social enterprise
What is a bank loan ?
Lend a business money over a certain period of time. paid back in monthly instalments with interest
What are the advantages of bank loan ?
- Regular fixed instalments
- makes it easier for the business to budget
What are the disadvantages of bank loans ?
- Interest must be paid along with the amount borrowed
- small business tend to pay a higher interest rate
Who is bank loan available to ?
Soletrader
Partnership
Private limited company
Social enterprise
What is share issue ?
selling more shares to raise capital for the business
What are the advantages of a share issue ?
- don’t need to pay money back
- a large sum of money can be raised
What are the disadvantages of a share issue ?
- More shareholders means more dividends (profits are shared)
- Selling shares may result in less control of the business
Who is share issue available to ?
Private limited company
What is a mortgage ?
A loan from the bank which can only be paid back in monthly instalments
What are the advantages of a mortgage ?
- Can borrow a large sum over a long period
- monthly payments are agreed with the bank which makes it easier for the business to budget
What are the disadvantages of a mortgage ?
- interest has to be paid back on top of repaying the mortgage
Who is mortgage available to ?
Soletrader
Partnership
Private limited company
What is debt factoring ?
a business sells their debt to a debt factoring company
What are the advantages of debt factoring ?
- The business will recoup some of the debt that they own
- They save the time of having to chase up customers to pay their debt
What are the disadvantages of debt factoring ?
- The business will not receive the full amount of the debt that they are owned
Who is debt factoring available to ?
Private sector
