Sources of finance Flashcards
What is retained profit
Profit(TR-TC) kept within a business after tax to help finance future activity
Retained so it becomes part of total equity or distributed as dividends
Advantages of retained profit
Do not have to repay which helps cash flow
No interest charges which reduces costs
Does not dilute business ownership
Disadvantages of retained profit
Only an option if sufficient profit exists within the business
May cause shareholder dissatisfaction if done at the expense of dividends
What are net current assets
Difference between current assets and current liabilities that can be used to fund day to day activities e.g replenish inventory
What are current assets
Items of value owned by a business that will be used and change in value within a year e.g inventory, trade receivables, cash and cash equivalents
What are current liabilities
Items owned by a business that are to be repaid within a year e.g trade payables and overdrafts
Advantages of net current assets
No interest payments
No loss of ownership
Disadvantages of net current assets
May lower profitability if customers are lost due to short credit terms
May lose discounts from suppliers if long credit terms are required
What are sale of assets
Method of raising short term finance by disposing of a business asset for cash
Improves short term cash flow problems but may affect long term profitability
Advantages of sale of assets(non current)
No interest charges/repayments
May turn obsolete asset into finance
Immediate lump sum of cash injection
Disadvantages of sale of non current assets
Expensive in the long run if need to lease the asset back
Loss of the use of asset/future value
One off option(Can’t be resold)
What are external sources of finance
Funds raised from outside the business
Involves taking on debt, issuing equity or applying financial support
What is owners capital
Entrepreneur invests their own money into a business
Advantages of External sources/owners capital
No repayment which helps cash flow
No interest charges which reduces costs
Owners maintain control giving them greater autonomy in decision making
No lengthy application procedures
Disadvantages of external sources/owners capital
Limited amounts available
Threat to personal finances/family
Opportunity cost of the investment
What are loans
Lender provides capital to a borrower and the borrower agrees to repay with interest over a period of time
Advantages of loans
Quick and easy to secure
Fixed interest rates which allow for budgeting
Improved cash flow as cost is spread out
Disadvantages of loans
Interest must be paid regardless of financial situation
More expensive than other forms of finance
Penalty for early repayment
What is crowdfunding
Raising finance from a large number of people investing different amounts of money(often small)
Internet is used to explain details
Advantages of crowdfunding
Saves time/money
Helps establish customer base
High level of control
Disadvantages of crowdfunding
Investor is only tied into their promised contribution if total amount is raised
Some crowdfunding websites only release funds if 100% target is reached
Larger sums may require bank loans
What is venture capital
Investment from an established business/person into another business in return for a percentage equity in the new business
High risk/high reward investment
Venture capitalist can mentor the business
High rate of return in a specific time period
Advantages of venture capitalist
Potential for large sums of money from investment
Mentoring from venture capitalist
Provides required capital for expansion
Disadvantages of venture capital
Long complex process
Expensive for the business at first(e.g legal/accounting fees)
Partial loss of ownership
Risk of conflict/interference
What is hire purchase
Financial agreement that allows the use of an asset whilst paying for it in regular instalments
Advantages of hire purchase
Avoids one of lump sum payments
Makes budgeting easier
Helps cash flow management
Disadvantages of hire purchase
Interest can reduce profitability
Business doesn’t own the asset until instalments have been paid
What is leasing
Contract that allows other parties to rent assets
Advantages of leasing
Allows business to use asset with owning it
Instalments makes budgeting easier
Lease company is responsible for repairs/maintenance
Disadvantages of leasing
Costly in the long run reducing profitability
Business never actually owns the asset
What is trade credit
Supplier pays for goods/services received at an agreed later date
Impacts cash flow for both parties
Business may lose out on discounts offered for immediate or quick payments which increases costs
What are grants
Fixed amounts of capital provided to business by the government or other organisations to fund specific projects.
Difficult to obtain/lengthy application process
Limited availability
What are the conditions attached to grants
Located in a high area of deprivation
Provide employment
Reduce environmental impacts
Support a good cause
What is invoice discounting
Negotiating discounts e.g reduction in prices on invoices from suppliers
Reduces costs
Result of early payment/bulk buying
May affect profitability if you’re giving people discounts
