sources and methods of finance-miss duddigan Flashcards
what is internal finance
finance comes from within the business
what is external finance
finance comes from outside the business
what are methods of internal finance
owners capital
retained profit
sale of assets
what is owners capital
what is the advantage and disadvantage
when the owner invests into a business often personal savings
-likely used for sole traders or partnerships when starting up
adv-doesn’t need paying back
dis-amount is limited depends on wealth of individual
what is sale of assets and adv and dis
selling unneeded assets to generate capital
such as old machinery etc
-newer or efficient businesses less likely to use as they use all there assets already
adv- don’t need to pay interest meaning cheap source of finance
dis-business no longer owns asset
can take long time to sell and get cash
what is retained profit
where profit is retained built up and used for later investment
-newer businesses cant use as dont yet have enough profit
-adv-no interest to pay on it!
dis-isn’t used on its own to fund expansion most of the time
what are methods of external finance
friends and family
banks
peer to peer lending
business angels
crowd funding
other businesses
adv and dis of using friends and family
adv-normally as a gift and normally willing to pay little or no interest
dis-may be little amount and could cause strain on relationship of not given back in right time
adv and dis of using banks
banks offer overdrafts, mortgages and loans
adv-banks can often give extra advice
dis-strict lending criteria
adv and dis of using peer to peer lending
operated online
allow individuals to lend money to other individuals or businesses
adv-good option if bank loan has refused
adv and dis of business angels
wealthy individuals investing in business as see it could be successful
adv-may have a lot of business knowledge and useful contacts
dis-may interfere with business decisions/they now have some control into the business
adv and dis of crowd funding
raising money on the internet
each person contributes to small amount but all together can be a lot
common for start up businesses
bsuiness puts details of new idea on website and then people fund
rewards often fiven to those who donate such as discounted price
what methods of finance most likely to be used for short term
overdrafts
leasing
grants
trade credit
overdrafts adv and dis
bank lets a business have negative amount of money in bank account
adv- easy to arrange and flexible-can borrow as little or as much as they need to up to overdraft limit
dis-may be fixed charge for using them so not good for long term
leasing adv and dis
business doesn’t have enough money for new assets can lease instead
paying monthly sums of money each money to get the use of an asset
adv-business dont have to pay large up front sum for asset at start
dis-can be more costly on long run then just buying an asset
grants adv and dis
fixed sum of money often given by government
adv-doesn’t have to be paid back
dis- application process can be long and time consuming
trade credit adv and dis
when business buys a good or service and doesn’t have to pay straight away
has agreed time limit
dis-missing out on discounts for paying up front
failure to pay back in time could result in problems, will need to pay back and may get a fee
what are the long term methods of finance
loans
share capital
venture capital
loans adv and dis
fixed amount of money borrowed to be lender back over a fixed period of time
can be from families friends peer to peer lenders etc
adv- only have to pay back loan and interest
loan provider wont own any of the business
dis-difficult to arrange, loan provider only going to loan if they think there going to get that money back
share capital adv and dis
money raised by selling shares in the business
adv-doesn’t have to be repaid
dis-original owner no longer owns all of the business
shareholders now expect shares of the profits as dividends
costly and time consuming
shareholders may want a say on how business is being operated
venture capital adv and dis
money that can be used as a method of finance for business in high risk but high potential to be successful
can be provided by business angels(potential)
provide much more money then business angels
most likely want well established business other then start up business
adv-doesn’t have to be repaid
dis- investors may want big say into the business.
