Section 6 Flashcards
Why does a business need finance
-To fund start up costs and running costs
-If the business grows it will need to cover expansion.
Factors affecting the choice of finance
-The amount needed
-Reason why finance is required
-Legal status of the business.
Whats Internal finance
Raising funds from within the business for example owners funds,selling unwanted assets,retained profits
Whats external finance
Raising funds from outside of the business which allows them to raise large amount if funds for example bank overdraft,loan from friends and family.
Whats internal -owners funds advantages
-provides strong evidence that the entrepreneurs committed to the business.
-Maximises the control that the entrepreneur has.
-Interest free.
Whats the owners funds disadvantages (internal)
-the amount available may be limited.
-If business fails the amount invested may be lost which could cause personal issues.
What are the retained profit advantages (internal)
-The owners have full control whether how much of the profits they want to invest.
-No interest has to be paid.
What are the retained profits disadvantages (internal)
-If a business needs finance it’s unlikely to have any profits.
-Growth may be slow as the profits may not be high enough to finance growth.
Advantages of selling unwanted assets (internal)
-The business still keeps full control no risk of takeover.
-No finance needs to be repaid.
Disadvantages of selling unwanted assets (internal)
-Unlikely to be long term solution as most business need to raise finance so it will just be one of.
-reduces the value of the business as the assets will already be sold and the business won’t gain value.
Whats hire purchase
Allows the business to use products or equipment,whilst making payments (renting).It will own the product after the final payment.
Advantages of hire purchase (external)
-Allows a business to use a product it may not be able to afford.
-Helps improve cash flow as the business doesn’t need all the money up front.
Disadvantages of hire purchase (external)
-Payments are likely to add up to more than the original amount.
Whats trade credit
Allowing the business to have the goods now and pay for them later.
Advantages of trade credit (external)
-Allows the business to use the goods in the manufacturing process and even sell the goods before it pays the suppliers.
Disadvantages of trade credit (external)
-Danger of bad reputation with supplier if bills aren’t paid on time.
