SOF Flashcards
Why do businesses need finance?
- to buy fixed assets like factories, offices and machinery
-to pay a day to day costs like wages and bills so the business can survive
What type of sources of finance are there?
Internal and External
What is internal finance?
Money from within the business such as profit
What is external finance?
Comes from sources outside the business like bank loans or shareholder investments
Why may a business requires short-term finance
To pay its suppliers or to cover the temporary shortage of cash
What is the time frame for Short term finance?
paid back within a year
What is the time frame on Long term finance?
Usually due over a longer period like 3 years or more
When choosing a source of finance, what 4 things should you consider?
- legal structure of the business
- amount of finance required
- level of risk involved
- if short term or long term finance is needed
How can internal finance be raised?
- putting profits back into business
- selling assests
What are retained profits?
Profit that is retained and built up over the years for later investment - can work in short and long term.
What is the main benefit of using profit for investment?
the business doesn’t have to pay interest on the money
What is the disadvantage of using retained profits?
Not all businesses can use this method as they might not be making enough profit
Why may shareholders be against retained profits?
they may wish to receive the profits as dividends, and by retaining the profits this may cause the business to miss out on investment opportunities
What is an overdraft?
where a bank lets a business have a negative amount of money in its bank account
What are benefits for an overdraft?
-easy to arrange
-flexible: businesses can borrow as little or as much as they need (up to overdraft limit)
-only pay interest on the amount of overdraft that they use
What are the disadvantages of an overdraft?
-high rates of interest
-may also be a fixed charge for using an overdraft
-unsuitable for use in the long term
What is debt factoring?
When banks and other financial institutions take unpaid invoices off the hands of the business and give them and instant cash payment
What is an advantage of debt factoring?
they can instantly get money that they are owed
What is a disadvantage of debt factoring?
debt factoring companies keep some of the money that owed as a fee.
What type of source of finance are bank loans?
Bank loans are an external source of finances
What is a bank loan?
Businesses are able to borrow a fixed amount of money and pay it back over a fixed period of time with interest
What do banks need from a business to get a loan?
some sort of security usually in the form of property
What are loans a useful source of finance for?
Loans are a good long term source of finance for a start-up business and for paying assets back like machinery and computers
What are loans not good for?
They are not a good way to cover the day to day running cost of the business
What are the advantages of bank loans?
-guaranteed the money for the duration of the loan
-only have to pay back the loan and interest
-interest charges are usually lower than for an overdraft
What are disadvantages of bank loans?
-difficult to arrange because a bank will only lend to a business if they think they are going to get it back
-keeping up with repayments can be difficult with bad cash flow in the business
-may have to pay a charge if they pay it back early
What is share capital and what type of source of finance is it?
Money that is raised by selling shares in a business, it is an external source of finance
What is an advantage of share capital?
-money doesn’t need to be repaid
-new shareholders can bring additional expertise
What are drawbacks of share capital?
-original owner no longer own the whole business, may have to pay shareholders a dividend and also give them a say in how the business is run.
What is venture capital and what souce of finance it it?
Venture capital is funding in the form of share or loan capital that is invested in a business that is thought to be high-risk.
What are venture capitalists?
professional investors who invest in businesses they think have the potential to be successful. They provide business advice but applying for funding is a long process
What is crowdfunding?
A method of financing a business or project using contributions made by a large number of people, usually done via the internet through organisations such as Kickstarter.
What is gross profit?
the amount left over when the cost of sales is subtracted from sales revenue. Cost of sales includes the costs directly related to making the product.
