finance unit Flashcards
what is a bank overdraft
Allows a business to overdraw an amount of money from their bank account
advantages of a bank overdraft
- Easy to set-up
- Quick to access finance
disadvantages of a bank overdraft
Must be paid back quickly or can be expensive due to high interest rates
what sources of finance would be used in private sector
- bank overdraft
- government grant
- retained profits
-leasing
-bank loan - share issue
- mortgage
what sources of finance would be used in third sector
- government grant
- retained profits
-bank loan
what is a government grant
A government grant is finance granted to a business from the government. This is often given to encourage entrepreneurs to start up a new business or open a business in a particular area
advantages of a government grant
Provides finance which does not have to be repaid
disadvantages of a government grant
- One off payments
- Will have criteria the business must fulfil in order to obtain the grant e.g. provide employment in an area
what is retained profits
This is when a business saves a portion of its profits and reinvests back into the company.
advantages of retained profits
Profits belong to the company, so owner is in control
disadvantages of retained profits
- Relying on profits is risky, as some months a business may not make profits
- May run out of retained profits quickly
what is leasing
A business can lease (or rent) vehicles or machinery from another company. They pay a monthly fee and the leasing company takes care of the maintency.
advantages of leasing
- The leasing company will repair and maintain the machinery which saves the business costs.
- If a business has limited finance this does not require a large initial payment
disadvantages of leasing
- The business will never own the asset
- In the long run the monthly costs will total to more than it would have cost to buy the asset outright.
what is a bank loan
A bank loan is when a financial institution such as a bank or building society will lend a business money over a set period of time. Usually 5 to 20 years.
advantages of a bank loan
- Payments are in regular fixed instalments
- This makes it easier for the business to budget
disadvantages of a bank loan
- Interest must be paid along with the amount borrowed
- Small business tend to pay higher interest rates
what is a share issue
Selling more shares raises capital for the business
advantages of share issue
- Large sums of money can be raised
- This does not need to be paid back
disadvantages of share issue
- More shareholders means more dividends (profits are shared)
- Selling shares may result in less control of the business
what is a mortgage
A loan from the bank which can only be used to buy property. This is paid back in monthly installments.
advantages of a mortgage
- The business can borrow a large sum of money over a long period of time e.g. 25 years.
- Monthly payments are agreed with the bank which makes it easier for the business to budget.
disadvantages of a mortgage
Interest has to be paid on top of repaying the mortgage.
what is a fixed cost
These are the expenses the business incurs which do not change with output.
what is a variable cost
These are the expenses which change according to the level of output, therefore, the more the business produces the higher the variable costs will be.
examples of fixed costs
- rent
- advertising
- rates
- salaries
examples of variable costs
- raw materials
- electrisity
