Management of Finance - Sources of Finance Flashcards
What is owners personal finance?
This includes personal savings and money borrowed from family and friends.
What are the advantages of owner’s personal finance?
- This allows the owner to keep control of the business.
- It can reduce the amount to be borrowed from other sources.
What are the disadvantages of owner’s personal finance?
- It can be difficult to withdraw savings once they are invested in the business.
- There is a risk that the owner could lose their savings if the business fails.
What are retained profits?
A business holding back profits from previous years.
What are the advantages of retained profits?
- This can be used to make larger purchases, such as assets or for bulk buying.
- The business doesn’t go into debt.
What are the disadvantages of retained profits?
- A business can find it more difficult to grow if it regularly uses retained profits, especially to solve short-term cash-flow problems.
What are sale of assets?
This refers to selling something that the business no longer needs.
What are the advantages of sale of assets?
- Money can be raised from the sale of an asset to boost cash flow.
- The money does not need to be repaid.
What are the disadvantages of sale of assets?
- If the finance is required urgently, the business may have to sell the asset for less than it is worth.
What is sell and lease back?
This refers to selling an asset and leasing (renting) it back.
What are the advantages of sell and lease back?
- The use of the asset is retained, which might be essential to the business, e.g. selling and leasing back the main shop/factory/office.
- The business passes over responsibility for maintaining and renewing equipment to the leasing company.
What are the disadvantages of sell and lease back?
- Leasing over a long period of time can be expensive - ultimately, the business may pay back more than it received from the sale.
What is share issue?
This refers to selling shares in the business. PLC’s sell on the stock market. Ltds sell shares privately.
What are the advantages of share issue?
- Very large sums of money can be raised through the sale of shares.
- The money does not need to be repaid.
What are the disadvantages of share issue?
- Dividends have to be paid to shareholders.
- It can be expensive to advertise and organise the sale of shares.
What is debentures?
These refers to loans given to the business by individuals. Interest is paid annually and the loan is paid back in full of an agreed date in the future.
What are advantages of debentures?
- Control of the business is retained.
- These can be paid back over a long time.
What are disadvantages of debentures?
- Interest must be paid annually, even if a loss is made, unlike with shares where dividends are only paid out if profits are made.
What is bank overdraft?
This refers to a facility which allows a business to spend more money than is in its bank account.
What are advantages the bank overdraft?
- This is usually easy for a business to arrange with its bank.
- It allows a business to continue to pay business expenses despite having no money in its bank account.
What are disadvantages the bank overdraft?
- High interest rates are usually applied by the bank for borrowing money in this way.
- The overdraft can be withdrawn by the bank at any time and must then be repaid.
What is trade credit?
Allows a business to buy good from suppliers and pay them at a later date.
What are the advantages of trade credit?
- This allows a business to sell goods at a higher price and earn a profit before the bill needs to be paid.
- It helps a business to keep going when cash flow is poor.
What are the disadvantages of trade credit?
- Discounts for prompt payment are lost.
- Suppliers will be reluctant to continue to offer credit if a business does not pay within the agreed credit period.
What is debt factoring?
This refers to business sells its unpaid customer invoices to a factoring company. The factoring company then collects and keeps the customers’ debts.
What are the advantages of debt factoring?
- Responsibility for collecting the debts is passed on to the factor, saving the company time and effort.
- Cash flow is improved by receiving an advanced payment of the debts from the factor.
What are the disadvantages of debt factoring?
- The business has to sell the customer debts for a reduced amount, i.e it receives less money than is actually owed.
- Factoring companies are usually only interested in large amounts of debts.
What are grants?
This refers to money given to a business from central or local government, the EU or the Prince’s Trust.
What are the advantages of grants?
- These are often offered as an incentive and a way of helping a business et started or expand.
- The money does not need to be repaid.
What are the disadvantages of grants?
- They can be complicated to apply for and can require the business to meet certain requirements.
- Grants are usually one-off payments that are not repeated.
What are bank loans?
This refers to when a bank agrees to lend a business money for a specific purpose, for a fixed period of time. Regular repayment instalments are put in place.
What are the advantages of bank loans?
- The business can budgets for the repayments.
- Purchases of essential equipment can be made in advance and paid ack over a number of years.
What are the disadvantages of bank loans?
- Interest has not to be repaid along with the loan amount.
- Small businesses may find it more difficult to secure a loan and often need to pay higher interest rates as they are at greater risk.
What is hire purchase?
This refers to a business that can buy an asset by paying an initial deposit and then monthly repayments for a fixed period of time.
What are the advantages of hire purchase?
- Expensive equipment can be bought with only an initial deposit.
- The asset, e.g. delivery vans, is owned y the business at the end of the repayment period.
What are the disadvantages of hire purchase?
- The business does not own the asset until the last instalment is paid.
- It can be an expensive form of borrowing if interest rates are high.
What is a mortgage?
This refers to a large sum of money borrowed from a bank or building society secured for a property.
What are the advantages of a mortgage?
- It can be paid over a long period of time, e.g. 25 years.
- The interest rate charged is often lower than the rate on a bank loan.
What are the disadvantages of a mortgage?
- Interest has to be repaid along with the loan amount.
- The mortgage provider owns the property until the last repayment is made. This means the business could lose the property if it does not keep up the repayments.
What are venture capitalists?
This refers to organisations that invest in established businesses in return for equity (ownership percentage).
What are the advantages of venture capitalists?
- Large amounts of investment can be gained.
- Venture capitalists are willing to take on more risky investments than banks.
What are the disadvantages of venture capitalists?
- Venture capitalists have an equity stake, which means control and a share of profits are given up.
What is crowd-funding?
This refers to small amounts of money from a large number of people are raised to fund a new business or a project. This is typically done via the internet, e.g. Kickstarter.
What are the advantages of crowd-funding?
- Finance can raised from individuals when banks see a venture as too risky.
- Some funds are donated, so there is nothing to repay.
What are the disadvantages of crowd-funding?
- There is a low success rate, Only a small percentage of crowd-funded ventures get off the ground, often because they have not reached their target amount.
- Privacy can be a problem as idea become public and can therefore be copied.
