Learning Aim D Flashcards
Sources of finance (3) ?
Retained profit
Net current assets
Sale of assets
Retained profit ?
Profit kept in the business to fund future expenditure
Net current assets ?
Money available in the business to fund day to day expenses
Sale of assets ?
Selling an item of worth owned by a business in order to achieve an immediate cash injection
What is Owners capital ?
Money invested in the business from owners personal savings
What is loans ?
Money borrowed from financial institution for a set period of time
Interest will be payable on the loan
What is crowd funding ?
Attracting investment from a larger number of speculative investors, usually through social Media
What is a mortgage ?
A long term loan usually about 25years, secured against an asset E.g. building
Interest will be paid on mortgage
What is venture capital?
Investment from an experienced entrepreneur in return for a stake/equity in the business
What is debt factoring ?
Selling on of a businesses debts to 3rd party to receive cash quickly.
Factor company pays business percentage of money owed and takes on responsibility of chasing debts
What is hire purchase ?
Paying to use an asset in instalments to spread the cost over its useful life
Asset will remain property of seller until final instalment has been paid
What is leasing ?
Paying to use an asset in instalments to spread cost of its useful life
Ownership remains with seller throughout agreed lease
What is trade credit ?
Period of time offered by suppliers to allow customer to purchase a good or service now and pay later E.g. 30 days after purchase
What are grants ?
A lump sum of money given by the government, can be used to provide and fund employment in deprived areas or for environmentally friendly research
What are donations ?
A lump sum of money given voluntarily to a charity or social enterprise
What is peer to peer lending ?
When one business person lends money to another business person in return for interest payments
What is invoice discounting ?
Reductions offered to customers
Advantages of owners capital ?
No interest payments or need to repay
High level of commitment from owner
Disadvantages of owners capital?
Amount available may be limited
More than one owner can cause friction
Advantages of loans ?
Regular pre agreed repayments make planning and budgeting easier
Ownership and control not lost
Disadvantages of loans ?
Interest is charged on amount borrowed
Interest rates can fluctuate
Often secured against an asset that can be seized if failure to meet repayments
Interest must be paid regardless if profit is being made
Advantages of crowd funding ?
Ability to raise finance from large group of investors
No interest is paid
Disadvantages of crowd funding?
Partial loss of ownership
No guarantee that crowd funding will attract sufficient investment
Advantages of mortgages ?
Large amounts of finance can be raised and repaid over long period of time
Ownership or control isn’t lost
Disadvantages of mortgages ?
Interest is charged on amount borrowed
Often secured against asset
Interest must be paid regardless of profit
Not suitable for small amounts
Advantages of venture capital?
Finance provided by business professional
Venture capitalists are likely to be high risk takers
Disadvantages of venture capital?
Partial loss of ownership and control
Conflict may arise between entrepreneur and venture capitalist
Advantages of debt factoring ?
Speeds up flow of cash into business from debts
Factor company takes on the risk of bad debt
Disadvantages of debt factoring ?
Only receive a percentage of amount owed, therefore reducing profit
Can give wrong impression or alienate customers
Advantages or hire purchase ?
Avoids need to pay lump sum for use or asset
Regular instalments makes planning and budgeting easier
Spreads cost
Disadvantages of hire purchase ?
Overall amount paid for asset is likely to be higher than if purchased outright
Only really suitable for low cost assets E.g. vehicles, not premises
Advantages of leasing ?
Responsibility for repairs stays with supplier
Spreads cost
Disadvantages of leasing ?
Overall amount paid likely to be higher than bought outright
Never actually have ownership of asset therefore payments will be ongoing
Advantages of trade credit ?
Delays need to pay for goods and services when purchased therefore aiding cash flow
No loss or ownership or control
Disadvantages of trade credit ?
Potential loss of discounts offered for cash payments
Only suitable for short term source of finance
Advantages of grants ?
No need to repay
No interest charges
No loss of ownership or control
Disadvantages of grants ?
Lengthy application process
May only be rewarded if certain conditions are met
Advantages of donations ?
No need to repay
No interest charges
No loss of ownership and control
Disadvantages of donations ?
Likely to be small amounts
Unpredictable
Advantages of peer to peer lending ?
Interest rates can be lower than lending from traditional financial institutions
Fixed rate of interest can be agreed
Disadvantages of peer to peer lending ?
Amount available may be limited and only available for a short time
Advantages of invoice discounting ?
No need to repay
No interest charges
No loss of ownership or control
Reduces costs to business therefore increases profit
Disadvantages of invoice discounting ?
Often only available if purchases are made in cash, therefore affecting cash flow
