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Business A-level > Sources of Finance > Flashcards

Sources of Finance Flashcards

1
Q

What is sources of finance?

A

where money comes from to fund the business

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2
Q

Why is finance needed for stating up?

A
  • buing stock / raw materials
  • capital equipment / furniture
  • marketing / advertising
  • vechiles
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3
Q

Why is finance needed for growing the business?

A
  • more marketing
  • buying other businesses
  • partner with other companies
  • increase stock
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4
Q

What is long term finance?

A
  • finances the whole business over many years
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5
Q

Examples of long term finance?

A
  • share capital
  • retained profits
  • venture capital
  • mortgages
  • long-term bank loans
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6
Q

What is medium term finance?

A

finances major projects or assets with a long life

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7
Q

Examples of medium term finance?

A

bank loans
leasing
hire purchase
government grants

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8
Q

What is short term financing?

A

finances day to day trading of the business

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9
Q

Examples of short term financing?

A
  • bank overdraft
  • trade creditors
  • short-term bank loans
  • factoring
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10
Q

What are the 4 factors influencing the choice and amount of finance required?

A
  • what is the finance required for?
  • the cost of the finance
  • flexibility of the finance
  • the business organisational structure
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11
Q

What are the main internal sources of finance for a start up business?

A
  • founder finance

- friends and family

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12
Q

What are the main sorces of external finance for a start up business?

A
  • business angles
  • loans and grants
  • crowdfunding
  • bank loan
  • bank overdraft
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13
Q

What is founder finance?

A

varies personal sources of the entrepeneur

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14
Q

Give examples of founder finance?

A
  • cash and investments
  • redundancy payments
  • inheritances
  • personal credit cards
  • re-mortgaging
  • putting free time into the business
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15
Q

What are some benifits of personal sources of finance?

A
  • no interest (cheaper)
  • not paying anyone back
  • less stressful
  • less delay
  • more founder puts in, more others will invest
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16
Q

What are some internal sources for established businesses?

A
  • retained profits
  • working capital
  • asset disposal
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17
Q

What are some external sources for established businesses?

A
  • share issues
  • bank loans and overdrafts
  • peer to peer lending
  • debentures
  • venture capital
  • supplier finance
  • debt factoring
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18
Q

Why can start-up businesses not use retained profits?

A

new businesses wont have any retained profits

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19
Q

What are benefits of retained profits?

A
  • cheap
  • very flexible
  • shareholders control the proportion retained
  • dont dilute ownership of company
20
Q

What are disadvantages of retained profits?

A
  • 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
21
Q

What is working capital?

A

the capital of a business which is used in every-day trading

22
Q

What is asset disposal?

A

-selling assets for money

23
Q

key parts to asset disposal?

A
  • one of boost to finance
  • not all businesses have them
  • (land, surplus equipment)
24
Q

What are share issues?

A

giving shares of your company for money

25
Q

Advantages of share issues?

A
  • raise substantial funds
  • broader base of share holders
  • equity rather then debt means low risk
26
Q

Disadvanategs of share issues?

A
  • can be costly and time consuming

- existing shareholders’ holdings may be diluted

27
Q

What are bank loans?

A

money given by the bank but they expect interest

28
Q

Key things about bank loans?

A
  • medium or long term
  • loan over fixed period
  • rate of interest either fixed or varied
  • generally lower interest rate then overdraft
  • not much flexibility
29
Q

What is a bank overdraft?

A

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
30
Q

Bank over draft advanatges?

A
  • relatively easy to arrange
  • felxible
    only pay back interest on amount borrowed
  • not secured on assets of business
31
Q

Disadvanatges of bank overdraft?

A
  • withdrawn at short notice
  • interest charge varies with changes in interest rate
  • higher interest then bank loan
32
Q

Advantges of bank loan?

A
  • greater certainty of funding
  • lower interest then overdraft
  • appropriate method of financing fixed assets
33
Q

Disadvanatges of bank loan?

A
  • requires security money
  • interest paid on full amount outstanding
  • harder to arrange
34
Q

What is debt factoring?

A

if people owe you money you sell the debt to a third party in return for a fee, typically 10-20% of debt value

35
Q

Advantages of debt factoring?

A
  • solves cash flow problems
  • use money to continue to trade
  • quick
  • reduces admin
36
Q

Disadvantages of debt factoring?

A
  • loss of revenue

- customer reputation worsening

37
Q

What is a debenture?

A

form of bond or long term loan issued by the company, usually with fixed interest rate

38
Q

Main info on debentures?

A
  • long term (10-20 years)
  • issued by company
  • fixed rate of interst
  • can be traded
39
Q

What is venture capital?

A

specialist investors in private companies for a large share

40
Q

Main criteria of venture capital?

A
  • 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)
41
Q

Advantages of venture capital?

A
  • can raise substantial amounts
  • business benefits from specialist investor support
  • brings better dicipline to management and startergy
42
Q

Disadvantages of venture capital?

A
  • 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
43
Q

What is supplier finance?

A

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

44
Q

What is peer to peer mentoring?

A

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
45
Q

What is crowd funding?

A
  • 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

Business A-level (29 decks)

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