Sources of Finance Flashcards
What is sources of finance?
where money comes from to fund the business
Why is finance needed for stating up?
- buing stock / raw materials
- capital equipment / furniture
- marketing / advertising
- vechiles
Why is finance needed for growing the business?
- more marketing
- buying other businesses
- partner with other companies
- increase stock
What is long term finance?
- finances the whole business over many years
Examples of long term finance?
- share capital
- retained profits
- venture capital
- mortgages
- long-term bank loans
What is medium term finance?
finances major projects or assets with a long life
Examples of medium term finance?
bank loans
leasing
hire purchase
government grants
What is short term financing?
finances day to day trading of the business
Examples of short term financing?
- bank overdraft
- trade creditors
- short-term bank loans
- factoring
What are the 4 factors influencing the choice and amount of finance required?
- what is the finance required for?
- the cost of the finance
- flexibility of the finance
- the business organisational structure
What are the main internal sources of finance for a start up business?
- founder finance
- friends and family
What are the main sorces of external finance for a start up business?
- business angles
- loans and grants
- crowdfunding
- bank loan
- bank overdraft
What is founder finance?
varies personal sources of the entrepeneur
Give examples of founder finance?
- cash and investments
- redundancy payments
- inheritances
- personal credit cards
- re-mortgaging
- putting free time into the business
What are some benifits of personal sources of finance?
- no interest (cheaper)
- not paying anyone back
- less stressful
- less delay
- more founder puts in, more others will invest
What are some internal sources for established businesses?
- retained profits
- working capital
- asset disposal
What are some external sources for established businesses?
- share issues
- bank loans and overdrafts
- peer to peer lending
- debentures
- venture capital
- supplier finance
- debt factoring
Why can start-up businesses not use retained profits?
new businesses wont have any retained profits
What are benefits of retained profits?
- cheap
- very flexible
- shareholders control the proportion retained
- dont dilute ownership of company
What are disadvantages of retained profits?
- danger of hoarding cash
- shareholders may prefer dividends if the business is not achieving sufficiently high returns on investment
- high profits and cash flows would suggest the business could afford debt
What is working capital?
the capital of a business which is used in every-day trading
What is asset disposal?
-selling assets for money
key parts to asset disposal?
- one of boost to finance
- not all businesses have them
- (land, surplus equipment)
What are share issues?
giving shares of your company for money
Advantages of share issues?
- raise substantial funds
- broader base of share holders
- equity rather then debt means low risk
Disadvanategs of share issues?
- can be costly and time consuming
- existing shareholders’ holdings may be diluted
What are bank loans?
money given by the bank but they expect interest
Key things about bank loans?
- medium or long term
- loan over fixed period
- rate of interest either fixed or varied
- generally lower interest rate then overdraft
- not much flexibility
What is a bank overdraft?
bank lets business owe it money when balance goes below 0 in return for high interest
- flexible
- long term
- great for helping businesses through seasonal fluctuations
Bank over draft advanatges?
- relatively easy to arrange
- felxible
only pay back interest on amount borrowed - not secured on assets of business
Disadvanatges of bank overdraft?
- withdrawn at short notice
- interest charge varies with changes in interest rate
- higher interest then bank loan
Advantges of bank loan?
- greater certainty of funding
- lower interest then overdraft
- appropriate method of financing fixed assets
Disadvanatges of bank loan?
- requires security money
- interest paid on full amount outstanding
- harder to arrange
What is debt factoring?
if people owe you money you sell the debt to a third party in return for a fee, typically 10-20% of debt value
Advantages of debt factoring?
- solves cash flow problems
- use money to continue to trade
- quick
- reduces admin
Disadvantages of debt factoring?
- loss of revenue
- customer reputation worsening
What is a debenture?
form of bond or long term loan issued by the company, usually with fixed interest rate
Main info on debentures?
- long term (10-20 years)
- issued by company
- fixed rate of interst
- can be traded
What is venture capital?
specialist investors in private companies for a large share
Main criteria of venture capital?
- manage investment funds designed to achive high rates of returns
- focus on larger investments (£1 mil+)
- seek large shares of share capital and representation on the board
- look to sell investment in the medium term (5-7 yrs)
Advantages of venture capital?
- can raise substantial amounts
- business benefits from specialist investor support
- brings better dicipline to management and startergy
Disadvantages of venture capital?
- venture capitalist requires a high rate of return
- investmnet often supported by a high-level of bank debt in business
- not a long term investment (sell within 5-7 years)
- loss of control
What is supplier finance?
delaying payment of bills, suppliers provide goods and services in advance of payment = trade creditors
as business expands the amount owed to suppliers at any one time also grows
What is peer to peer mentoring?
way for businesses to raise loan finances without using banking. involves raising a loan from a group of individuals or institutions and is a very flexible source of borrowing, minimum loan of 5000 - 50 000 and from 6 months to a year
- unsecured,
- connects businesses looking for finance with individuals willing to invest or loan
- managed by online intermediaries
What is crowd funding?
- type of peer to peer funding
a business or entrepeneur can attract a crowd of investors - each of whom take a small stake by contributing towards an online fundraising target
