Paper 2 revision external finance Flashcards
Describe loans
A sum of money is borrowed and repaid (with interest) over a determined period of time
Bank loans are usually unsecured and are typically repaid over two to ten years
Describe the advantages and disadvantages of loans
+ Interest rates are fixed for the term of the loan.
Repayments are made in equal instalments, helping budgeting
- Interest rates depend on the businesses credit rating.
Non-current liabilities are increased in the balance sheet
What are overdrafts?
An arrangement for business current account holders to spend more money than it has in their account.
A limit is agreed and interest is charged only when a business ‘goes overdrawn’.
What are the benefits and disadvantages of overdrafts?
+ A short-term source of finance that offers significant flexibility and aids cash flow.
- An overdraft may be ‘called in’ if the bank is concerned about a business’s ability to repay what it owes
Define Share Capital
Share capital is finance raised from the sale of shares in a limited company.
Shareholders are the owners of shares and they are entitled to a share of the company’s profit when dividends are declared.
What are the advantages and disadvantages of share capital?
+ Large amounts of capital can be raised, especially by public limited companies.
Interest is not payable on finance raised in this way.
- Shareholders usually have a vote at a company’s Annual General Meeting (AGM) where they can have a say in the composition of the Board of Directors.
What is venture capital?
Funds provided by specialist investors in small to medium-sized businesses that have significant potential for growth e.g. in the technology sector.
What are the advantages and disadvantages of venture capital?
+ Businesses that may have been refused finance from other sources may be able to attract investment from less risk-averse venture capitalists.
- Venture capitalists usually require a stake in the business in return for finance and often expect to exert some control over the business.
What is leasing?
An asset such as a piece of machinery or a vehicle used by the business in return for regular payments.
E.g. many businesses lease office equipment such as photocopiers and IT equipment.
What are the advantages and disadvantages of leasing?
+ The business does not own the asset during the period of the lease and so is not responsible for maintenance or repair costs.
- Leasing is usually more expensive in the long run than buying an asset.
What is trade credit?
An agreement is made with suppliers to buy raw materials, components and stock which are paid for at a later date, typically 30 to 90 days later.
What are the advantages and disadvantages of trade credit?
+ Trade credit is usually interest-free.
- Discounts for early payment will not be available.
Define grants.
Governments and industry trusts may offer grants to businesses that meet specific criteria.
What are the advantages and disadvantages of using grants?
+ Grants do not need to be repaid.
- The business must use the finance for its intended purpose.
