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business > finance - sources of finance > Flashcards

finance - sources of finance Flashcards

1
Q

Give 2 reasons why firms need finance.

A
  • New firms need start-up capital
  • New firms need additional finances to cover poor cash flow
  • To cover shortfall in liquidity when customers delay payments
  • To meet day-to-day running costs
  • To expand
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2
Q

What is a government grant?

A

Financial support given to a business by the Government.

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3
Q

Is a government grant an internal or external source of finance?

A

External.

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4
Q

Give 2 advantages of government grants.

A
  • Don’t have to be repaid

* Often linked to additional support

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5
Q

Give 2 disadvantages of government grants.

A
  • Difficult to qualify

* Money may have to be spent in a specific way

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6
Q

What is trade credit?

A

When goods or services are received now but paid for at a later date.

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7
Q

Is trade credit an internal or external source of finance?

A

External.

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8
Q

Give 2 advantages of trade credit.

A
  • Resolves short term cash-flow problems

* Business has time to earn money to pay off the debt

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9
Q

Give 2 disadvantages of trade credit.

A
  • Dependent upon a good relationship with suppliers
  • May lose out on discounts available for cash or early payments
  • Late payments incur large fees
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10
Q

What is an overdraft?

A

When you can withdraw more money than you actually have from a bank account.

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11
Q

Is an overdraft an internal or external source of finance?

A

External.

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12
Q

Give 2 advantages of an overdraft.

A
  • Businesses can make payments on time even if they don’t have enough cash
  • Quick and easy to arrange
  • Only pay interest on the money borrowed
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13
Q

Give 2 disadvantages of an overdraft.

A
  • Usually have a higher interest rate than other loans
  • Bank can cancel the overdraft at any time
  • Banks may secure the overdraft against the business’ assets
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14
Q

What is a bank loan?

A

A set amount of money borrowed from the bank, normally for a specific purpose, to be paid back over a period of time.

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15
Q

Is a bank loan an internal or external source of finance?

A

External.

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16
Q

Give 2 advantages of a bank loan.

A
  • Quick and easy to take out
  • Lower interest rates than overdrafts
  • Fixed interest rates allow business to budget
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17
Q

Give 2 disadvantages of a bank loan.

A
  • Often requires collaterol
  • Interest must be paid
  • Often more expensive than other sources as a business can be charged for early payment
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18
Q

What is collaterol?

A

A business’ asset which is used as security on a bank loan.

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19
Q

What is a mortgage?

A

A long-term loan used to secure an asset, usually a building.

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20
Q

Is a mortgage an internal or external source of finace?

A

External.

21
Q

Give 2 advantages of a mortgage.

A
  • Improved cash flow
  • Fixed interest rates allow business to budget
  • Relatively low interest payments compared to other sources
22
Q

Give 2 disadvantages of a mortgage.

A
  • Property used as collaterol and can be repossessed by the bank if motgage isn’t paid off
  • Interest must be paid
  • Often more expensive than other sources - business can be charged for early payment
23
Q

What is hire purchase?

A

When a business purchases something by paying a deposit, then paying the rest in instalments over a period of time

24
Q

Is hire purchase an internal or external source of fnance?

A

External.

25
Q

Give 2 advantages of hire purchase.

A
  • Business has immediate use of asset
  • Supplier is responsible for maintenance
  • Allows business to purchase things they otherwise couldn’t afford
  • Have use of the product for a longer period of time
26
Q

Give 2 disadvantages of hire purchase.

A
  • Costs more in the long-term than buying the asset upfront

* High interest rates

27
Q

What are retained profits?

A

Profit kept within the business after tax to help finance future activity.

28
Q

Is retained profit an internal or external source of finance?

A

Internal.

29
Q

Give 2 advantages of retained profit.

A
  • Don’t have to repay
  • No interest
  • Instantly available
30
Q

Give 2 disadvantages of retained profit.

A
  • Limited funds
  • Not an option for start-up businesses
  • Larger compnies are under pressure from shareolders to give large dividents, reducing the profit they can retain
31
Q

What is selling unwanted assets?

A

Selling something unwanted which the business owns.

32
Q

Is selling unwanted assets an internal or external source of finance?

A

Internal.

33
Q

Give 2 advantages of selling unwanted assets.

A
  • No interest

* No need to repay

34
Q

Give 2 disadvantages of selling unwanted assets.

A
  • Resale value may be low
  • Can no longer use the asset
  • Limit to how many assets you can viably sell
35
Q

What is new share issue?

A

When a limited company issues more shares to individuals to give them part-ownership in the company.

36
Q

Give 2 advantages of new share issue.

A
  • No interest
  • No need to repay
  • Can raise large amounts of finance
37
Q

Give 2 disadvantages of new share issue.

A
  • Less control for existing owners

* Shareholders will expect to be paid dividents which reduces retained profit available

38
Q

What is internal finance?

A

Finance which comes from inside the business.

39
Q

Do start-up or established businesses use internal finance?

A

Established.

40
Q

Give 3 sources of internal finance.

A

• Retained profit
• Family and friends
* Selling unwanted assets

41
Q

Is new share issue an internal or external source of finance?

A

External.

42
Q

What is external finance?

A

Finance which comes from outside the business.

43
Q

Give 5 sources of external finance.

A 
• New share issue
• Bank loan
• Overdraft
• Mortgage
• Trade credit
* Government grants
• Hire purchase
44
Q

What is family and friends?

A

An informal arrangement between you and them to borrow money.

45
Q

Is family and friends an internal or external source of finance?

A

Internal.

46
Q

Give 2 advantages of family and friends.

A
  • Flexible
  • May be cheap or even free
  • May be an informal arrangement
  • May not have to repay
47
Q

Give 2 disadvantages of family and friends.

A
  • Can damage relationships/create stress

* May be a limited amount available

48
Q

Give 2 factors which affect a business’ choice of finance.

A
  • Size and type of company
  • Amount of money needed
  • Length of time the finance is needed for
  • Cost of the finance

business (29 decks)

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