mr jey 18nth march Flashcards
owners capital
This is money introduced by the existing owner of the business.
It is an internal source of finance
advntage of owners capital
No interest or repayments
No need to profits with new partners) or through dividends to shareholders.
No loss of control of the business
disadvantage of owners capital
There may not be enough cash available from the current owner
It is a slow way of financing expansion, so you may miss out on profits
Partners capital
This involves either changing from a sole trader to a partnership, adding a new partners to an existing partnership or existing partners contributing additional capital
advantages of partners capital
No interest or repayments
New partners can add expertise and share workload
disadvantages of partners capital
Control and profits must be shared with any new partners
It may not be possible to find new partners able to contribute the required capital
They are a permanent external source of finance
Ordinary shares
Shares are issued by limited companies: they cannot be issued by sole traders or partnerships. Shareholders are the owners of a company, and can vote at the AGM
advantages of shares
No interest or repayments
Dividends on ordinary shares depend on what the company can afford
No security is needed
They reduce the level of gearing
disadvantages of shares
Part of the profits will always have to be paid to the additional shareholders
Loss of control if over 50% of the company is sold to ordinary shareholders
Large amounts paid in dividends every six months can damage cash flow
debentures
They are long-term loans to a company that are secured on the assets of that company.
Debenture holders receive a fixed amount of interest each year.
They are repaid in full at the agreed date.
They are a long term external source of finance
advantage on debentures
No loss of control of the company (unlike shares)
No repayments at all for several years (unlike bank loans)
After the agreed date, no more interest or repayments are needed (unlike shares)
disadvantages of debenture
Interest is payable whether the company can afford it or not
Large repayments in one lump sum can damage cash flow at that time
They increase the level of gearing
They usually need security
bank loan
It is a fixed amount that must be repaid, plus interest, over a stated amount of time in equal monthly instalments.
Security must often be provided.
It is a long term external source of finance
advantage of bank loan
No more repayments after a set period of time (unlike dividends for shares)
No loss of ownership of the business (unlike shares)
No large lump-sum repayments, which is good for cash flow
disadvantages of bank loan
Interest is an additional cost to the business
Repayments must be made whether or not the business can afford them
Increases the level of gearing
Usually needs security
mortgage
It is a bank loan that is used to buy property and is secured on that property.
It is a long term external source of finance
advntages of mortgages
No more repayments after a set period of time (unlike dividends for shares)
No loss of ownership of the business (unlike shares)
The monthly repayments are an affordable way of buying property
disadvantages of mortgages
Interest is an additional cost to the business
The property is used as security, so it can be taken if unable to keep up the repayments
Increases the level of gearing
The large initial deposit may cause cash flow problems.
bank overdraft
This means that the bank account is allowed to have a negative balance. Interest is paid on the exact amount overdrawn, and security may be required.
It tends to be used for short-term borrowing rather than long-term borrowing
The overdraft facility must be agreed with the bank before the business is able to become overdrawn.
It is a short term external source of finance
advantages of bank overdraft
They are flexible: you borrow exactly how much you need, so no unnecessary interest
No loss of ownership of the business
They are repaid when the business is able to do so
disadvantages of bank overdraft
Interest is an additional cost to the business
The rate of interest is often higher than on bank loans
The overdraft facility can be cancelled by the bank without any notice
