Sources Of Finance Flashcards
INTERNAL SOURCES OF FINANCE
£ from within the business
TYPES OF INTERNAL SOURCES OF FINANCE
1) RETAINED PROFIT: profit kept from previous years to spend on unexpected bills or business improvements
2) NCA NET CURRENT ASSETS: having more £ coming in than going out so where your cash assets are greater than your debts
3) SALE OF ASSETS: selling items the business own
RETAINED PROFIT ADS and DISADS
Advantages:
1) Freedom and no need for an expensive bank loan (with high int. rates)
2) Security and planning ability of having easily obtainable money
3) Improves liquidity by having access to cash in the bank
Disadvantages:
1) Not possible for new businesses just setting up, businesses that don’t make sufficient profit or make a loss
2) Reduces the buffer of business savings
3) The money could be better spend somewhere else, invest them in products or expanding the business
NCA (net current assets) ADS and DISAD
Advantages:
1) Can pay day-to-day bills, avoid loans and debt
Disadvantages:
1) Need to chase people that owe the business money (trade receivables)
2) Difficult to obtain loans/finance
3) May take time to sell stock (stock is also considered a short term asset) and may need to sell stock at a discount
SALE OF ASSETS ADS and DISAD
Advantages:
1) Easy process that can raise money quickly
2) Releases valuable space to be utilised more profitably
3) Allows upgrading of technology or equipment to improve business efficiency
Disadvantages:
1) Can take years to sell items or receive money from the sale
2) May need the asset in the future and buy it at a higher price
3) Not every business has surplus (excess) assets to sell
EXTERNAL SOURCES OF FINANCE
£ from outside the business
TYPES OF EXTERNAL SOURCES OF FINANCE
1) Crowdfunding
2) Loans: usually from bank with fixed Interest
3) Hire Purchases: is different from leasing or renting, pay in instalments, you own it at the end, very good for liquidity, with Interest
4) Venture Capital: professional investors, share profit (dividend), control over the business (decision making)
5) Debt Factoring: selling on of a business’s debts to a third party in order to receive the cash quickly
6) Owner’s capital: £ invested in the business from the owner’s personal savings
7) Mortgage: property loans, own it at the end, 25-30 yrs, sometimes variable interest
8) Trade Credit: business gets time to pay 30,60,90 days no interest, the longer the better because it improves liquidity (being reliable)
9) Leasing: rent, you spread out payments but never own it, sometimes in the contract “option to buy” is included
10) Grants: don’t repay, for small businesses, free money, long process, time consuming
11) Donations: don’t repay off (gift)
12) Peer-to-peer lending: businesses lend to other businesses, LT, with interest
13) Invoice Discount: loan against future payments by costumer, ST option
CROWDFUNDING ADS and DISADs
Way to raise money online through websites by asking people to invest a small amount of money
Advantages:
1) Exposure of new business-market yourself to new customers and getting attention for your business idea
2) Hassle free and straightforward process
3) Low-cost platform to reach wide social network
4) Not tied to specific tech/applications accessible to all
5) Promote your business through network for low cost
6) Customers can track your progress and become loyal supporters
Disadvantages:
1) Idea is shared publicly, and this is a risk
2) Hard to differentiate yourself and get attention
3) Can take a long time to hit your fundraising target
4) Can lose some control over the business
5) Return money to investors if target is not hit
6) Project may be very small
VENTURE CAPITAL ADS and DISADS
Advantages: 1) Business expertise 2) Shared risk/responsibility 3) Expand business scape 4) Negotiate share Disadvantages: 1) Loss of control 2) Potential conflict 3) May result in minority ownership status 4) Business may be too small to attract venture capital
