Learning Outcome D Flashcards
Give reasons to why a business may need finance?
Pay employees, grow the business (expand), buy stock, buy machinery, invest in the business and buy assets.
How many sources of internal finance are there?
3.
Name the 3 sources of internal finance
Retained profits, net current assets and sale of assets.
Retained profit explanation
The amount of a businesses net income that is kept within its account to fund future expenses.
Advantages of using retained profits as an internal source of finance
+ Not interest charges.
+ Available immediately.
+ Avoids debt.
+ No loss of ownership.
Disadvantages of using retained profits as an internal source of finance
- Only an option if have a sufficient amount of retained profit within the business.
- Reduces dividends to shareholders.
- Limited amount.
Net current assets explanation
Money available for day-to-day running and operation of a business.
Advantages of using net current assets as an internal source of finance
+ No interest repayments.
+ No approvals needed.
+ Low costs.
+ Encourages the business to manage cash flow.
+ No loss of ownership.
Disadvantages of using net current assets as an internal source of finance
- May lower profitability if lose discounts for early repayments.
Sale of assets explanation
Sale of a long term fixed asset. A fixed assets will stay in the business for more than a year.
Advantages of using sale of assets as an internal source of finance
+ No interest/repayments.
+ May be turning obsolete asset into finance.
+ Immediate lump sum cash injection.
Disadvantages of using sale of assets as an internal source of finance
- May be expensive in the long run if need to lease asset back.
- Loss of use of asset and future value.
- It’s only a one off option.
How many sources of external finance are there?
13.
Name the 13 sources of external finance
Owner’s capital, loans, crowd funding, mortgages, venture capital, debt factoring, hire purchase, leasing, trade credit, grants, donations, peer to peer lending, invoice discounting,
Owner’s capital description
Amount of finance and resources an owner invests into their business from their own personal finance.
Owner’s capital advantages
Quick & convenient.
Does not require borrowing finance.
No interest payments to make.
No ownership lost.
Owner’s capital disadvantages
Limited amount available.
Owner might not have enough finance.
Owner may need the cash for personal use.
Personal finances at risk.
Loans advantages
Easy & quick to access.
Can get a large amount of finance at one time.
Easy to budget.
No ownership lost.
Loans definition
Finance borrowed from the bank which needs to be paid back + interest.
Loans disadvantages
Have to pay interest.
Difficult for a new business to access.
Crowd funding definition
Use of small amounts of capital from a large number of individuals to finance a new business venture.
Crowd funding advantages
Money may not need to be repaid.
Funds often come from many investors.
Build a customer base early.
No interest.
Crowd funding disadvantages
Fees can be steep.
Potential failure to meet goals and not receive finance.
Partial loss of ownership.
Mortgages definition
A long-term source of finance lent from a bank to purchase a property or land.
Mortgages advantages
No loss of ownership or control.
Large amounts of finance can be acquired and paid back over a long period of time.
Secured against asset that could be seized.
Mortgages disadvantages
Pay interest on amount borrowed.
Not suitable as a short term source of finance.
Venture capital defintion
Money invested in a business by investors (expect to receive high return) usually to start up.
Venture capital advantages
Finance is made available along with advice/mentoring.
Finance may be easier to obtain as venture capitalists are usually high risk high reward people (want return in their investment).
Venture capital disadvantages
Loss of ownership/control.
Conflict may occur over the direction of the business.
Debt factoring definition
When a business sells their invoices to a 3rd party at a discounted price in order to by pass the hefty waiting times which are associated with invoice payments.
Debt factoring advantages
Get quickly.
Improves the businesses cash flow.
Reduces risk of default on payments.
Debt factoring disadvantages
Only receive a percentage of the amount the business is owed.
Hire purchase definition
Used to purchase an asset.
A deposit is paid and the remaining amount for that asset is paid back monthly.
Hire purchase advantages
Expensive asset can be purchased and paid back over time.
Regular payments = spread out = good for budgeting.
Hire purchase disadvantages
Interest charged.
Equipment not owned until final payment is made.
Likely to cost more than buying asset outright.
Only suitable for lower cost items.
Leasing definition
A way of renting an asset that the business requires.
Monthly payments.
Item not owned at the end of the payments by the business.
Leasing advantages
Large amounts of finance not required up front.
Leasing companies responsible for repairs and maintenance.
Spread cost.
Leasing disadvantages
Overtime it can be a more expensive way to obtain assets (likely to cost more than buying outright).
Assets are never owned by a business.
Never own asset = payment ongoing.
Trade credit definition
Must be agreed with a supplier and forms a credit agreement with them. Allows businesses to obtain raw materials and stock but pay for them at a later date.
Mainly used as a short term source of finance.
Trade credit advantages
Access to suppliers without immediate payment.
No interest.
Helps with cash flow due to delayed payments.
No loss ownership/control.
Trade credit disadvantages
Short term, must be paid off quickly.
Usually small amounts.
Business may lose discounts for paying cash.
Grants definition
Fixed amount of money usually awarded by the government, EU (European Union) or charitable organisation.
Grants are given to a business on the condition that they meet certain requirements.
Grants advantages
Does not need to be repaid.
No interest payments.
No loss of ownership or control.
Grants disadvantages
Have to meet certain requirements.
Takes a long time to apply.
Donations definition
Funds given willingly to a charity or social enterprise.
Donations advantages
No need to repay.
No interest charged.
No loss of ownership/control.
Donations disadvantages
No reliable.
Usually received in small amounts.
Peer to Peer Lending definition
A form of direct lending of money to individuals or businesses without an official financial institution participation as an intermediary in the deal.
Peer to Peer Lending advantages
Interest rates can be lower than a traditional bank.
Easier to budget as repayments are at a fixed rate.
Peer to Peer Lending disadvantages
Amount available to borrow may be limited.
Short term source.
Invoice Discounting definition
Invoice Discounting advantages
Invoice Discounting disadvantages
