S6 - Finance Flashcards
Why do firms generally need finance ?
Start-up capital, additional finance to cover poor cash flow, to allow for delayed customer payments, to meet day-to-day running costs, and for expansion.
What are assets ?
Valuable items owned by a business, or money owed to the business.
What is liquidity ?
How easily a business can access cash.
What are some sources of finance open to businesses ?
Government grants, trade credit, overdrafts, loans; bank loans, mortgages and borrowing form friends and family, hire purchase, retained profits, selling assets and new share issue.
What are government grants ?
Given to small or new firms - don’t have to be repaid, but a strict criteria may have to be met to qualify and the money then has to be spent in a specific way.
What are short term sources of finance ?
Trade credit and overdrafts.
What is trade credit ?
Where businesses give other firms one or two months to pay for certain purchases - giving them time to earn the money to pay this debt. A late payment could result in a large fee.
What is an overdraft ?
Allows businesses to take more out of their bank account than they put into it, allowing them to make payments on time even without enough cash.
What is bad about an overdraft ?
Have a higher interest rate than other loans and banks can cancel the overdraft at any time. If it’s not payed off the bank can reposes some of the businesses assets.
What are some long term sources of finance ?
Loans - bank loans, mortgages and friends and family, and hire purchase.
What is hire purchase ?
When a firm purchases something with an initial deposit and then paying off the rest in instalments over a long period of time while they use the product.
What are the benefits of hire purchase ?
Allows firms to buy things they otherwise wouldn’t be able to such as expensive machinery or vehicles, and it means they can use the product over a longer period of time.
What are bank loans ?
Loans that are quick and easy to take out, repaid with interest - however this is generally lower than for overdrafts, and if not paid banks can repossess assets of the firm.
What are friends and family loans ?
Can also include your own savings - may be easier to acquire than from a bank and goes into the business immediately, however generally small amounts and lender may expect a share in the profits.
When are mortgages used ?
To finance buying of property - which can be used as collateral (can be taken by bank if mortgage not repaid) - has relatively low interest.
What other sources of finance are specifically available to established firms ?
Retained profits, fixed assets and new share issue.
What are retained profits ?
Profits owners put back into the business after they’ve paid themselves a dividend - larger companies may be under pressure to procure large dividends for shareholders so this limits the profit they can retain.
How can fixed assets be used ?
They can sell fixed assets (assets kept long term) that are no longer in use - there’s a limit though as too many can’t be sold if they want to continue trading.
What is new share issue ?
Limited companies can issue more shares to be bought by people for some ownership, money raised doesn’t have to be repaid to the shareholders but they’ll expect dividends, and existing owners will have less control.
What are internal sources of finance ?
Money raised form inside the business - quick and easy and saves borrowing and then paying interest, however some business may not have enough internal finance (personal/business savings, retained profits and selling fixed assets).
What are external sources of finance ?
Money raised form outside the business - usually needs to be paid back - sometimes with high interest (trade credit, hire purchase, government grants, new share issue, family/friends loan, bank loan, mortgages and overdrafts)
What four factors affect the choice of finance ?
The size and type of the company, amount of money needed, length of time finance is required for, and the cost of finance.
