finance - sources of finance Flashcards
Give 2 reasons why firms need finance.
- 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
What is a government grant?
Financial support given to a business by the Government.
Is a government grant an internal or external source of finance?
External.
Give 2 advantages of government grants.
- Don’t have to be repaid
* Often linked to additional support
Give 2 disadvantages of government grants.
- Difficult to qualify
* Money may have to be spent in a specific way
What is trade credit?
When goods or services are received now but paid for at a later date.
Is trade credit an internal or external source of finance?
External.
Give 2 advantages of trade credit.
- Resolves short term cash-flow problems
* Business has time to earn money to pay off the debt
Give 2 disadvantages of trade credit.
- Dependent upon a good relationship with suppliers
- May lose out on discounts available for cash or early payments
- Late payments incur large fees
What is an overdraft?
When you can withdraw more money than you actually have from a bank account.
Is an overdraft an internal or external source of finance?
External.
Give 2 advantages of an overdraft.
- 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
Give 2 disadvantages of an overdraft.
- 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
What is a bank loan?
A set amount of money borrowed from the bank, normally for a specific purpose, to be paid back over a period of time.
Is a bank loan an internal or external source of finance?
External.
Give 2 advantages of a bank loan.
- Quick and easy to take out
- Lower interest rates than overdrafts
- Fixed interest rates allow business to budget
Give 2 disadvantages of a bank loan.
- Often requires collaterol
- Interest must be paid
- Often more expensive than other sources as a business can be charged for early payment
What is collaterol?
A business’ asset which is used as security on a bank loan.
What is a mortgage?
A long-term loan used to secure an asset, usually a building.
Is a mortgage an internal or external source of finace?
External.
Give 2 advantages of a mortgage.
- Improved cash flow
- Fixed interest rates allow business to budget
- Relatively low interest payments compared to other sources
Give 2 disadvantages of a mortgage.
- 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
What is hire purchase?
When a business purchases something by paying a deposit, then paying the rest in instalments over a period of time
Is hire purchase an internal or external source of fnance?
External.
Give 2 advantages of hire purchase.
- 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
Give 2 disadvantages of hire purchase.
- Costs more in the long-term than buying the asset upfront
* High interest rates
What are retained profits?
Profit kept within the business after tax to help finance future activity.
Is retained profit an internal or external source of finance?
Internal.
Give 2 advantages of retained profit.
- Don’t have to repay
- No interest
- Instantly available
Give 2 disadvantages of retained profit.
- 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
What is selling unwanted assets?
Selling something unwanted which the business owns.
Is selling unwanted assets an internal or external source of finance?
Internal.
Give 2 advantages of selling unwanted assets.
- No interest
* No need to repay
Give 2 disadvantages of selling unwanted assets.
- Resale value may be low
- Can no longer use the asset
- Limit to how many assets you can viably sell
What is new share issue?
When a limited company issues more shares to individuals to give them part-ownership in the company.
Give 2 advantages of new share issue.
- No interest
- No need to repay
- Can raise large amounts of finance
Give 2 disadvantages of new share issue.
- Less control for existing owners
* Shareholders will expect to be paid dividents which reduces retained profit available
What is internal finance?
Finance which comes from inside the business.
Do start-up or established businesses use internal finance?
Established.
Give 3 sources of internal finance.
• Retained profit
• Family and friends
* Selling unwanted assets
Is new share issue an internal or external source of finance?
External.
What is external finance?
Finance which comes from outside the business.
Give 5 sources of external finance.
• New share issue • Bank loan • Overdraft • Mortgage • Trade credit * Government grants • Hire purchase
What is family and friends?
An informal arrangement between you and them to borrow money.
Is family and friends an internal or external source of finance?
Internal.
Give 2 advantages of family and friends.
- Flexible
- May be cheap or even free
- May be an informal arrangement
- May not have to repay
Give 2 disadvantages of family and friends.
- Can damage relationships/create stress
* May be a limited amount available
Give 2 factors which affect a business’ choice of finance.
- Size and type of company
- Amount of money needed
- Length of time the finance is needed for
- Cost of the finance
