Sources of Finance Flashcards
Define internal finance
Money that Comes from within a business
Define retained profits
Profits kept within the business to fund future expenditure.
Benefits of internal finance
No interest charges
Available immediately
Avoids debt
No loss of ownership
Limitations of internal finance
Limited amount.
Reduces divident to shareholders
Once used ut can’t be used for anything else
Define net current assets
Shows how much capital the business has for day to day expenditure
Benefits of net current assets
Encourages the business to manage cash flow
Limitations of net current assets
Pressures customers due to shorter credit terms.
May upset suppliers if longer credit is applied for.
Lower stock may make an impact on how the business meets demand.
Define sales of assets
When companies let go of some assets in exchange for needed cash or other forms of compensation.
Benefits of sales of assets
No interest charges.
Reduces capital tied up in assets so it can be used else where.
Disposes id unused assets.
Limitations of sale of assets
Can increase cost of asset if needs to be eventually replaced.
Often difficult to get an amount close to the value of asset.
Define external finance
Money that comes from outside the business
Examples of external finance
Owners capital Loans Leasing Trade credit Hire purchase
Define owners capital
The money provided to the business from the owners own pocket
Benefits of owners capital
No need to pay/repay interest.
High level of commitment from the owner
Limitations of owners capital
Limited funds
Personal financial issues
May cause problems if there is more then one owner.
Define loans
Money which is provided by a bank or loan provider.
Benefits of loans
Regular.
Scheduled payments to make it easier for business to budget.
Terms can be negotiated with provider.
Limitations of a business
Interest is changed on repayments.
Loans are secured on a asset which can be taken away if loans are not payed.
Define crowd funding
Where project is funded by many strangers using websites etc
Benefits of crowd funding
Access to large amount of investors.
Directly appeal to target markets.
Limitations of crowd funding
Partial loss of ownership
Not guaranteed to attract enough investment for proposal to be successful
Define mortgages
A large loan to purchase and expensive asset
Benefits of mortgages
Larges sums of capital can be raised and paid back over a long period of time.
Limitations of mortgages
Asset can be repossessed if payments are not made.
Long term financial commitment
Define venture capital
A venture capitalist invests in different businesses to make large returns.
Benefits of venture capital
Capital provided by a business professional who in knowledgeable.
Often take riskier investments.
Limitations of venture capital
Partial loss of ownership
Potential conflict with owner and VC
Define debt factoring
Where a business sells its debts to another company for quick access for money.
Benefits of debt factoring
Speeds up cash flow
The factor business takes on the risk of non payment.
Limitations of debt factoring
Only receive a portion of money owed.
Can give out a negative impression
Definition of hire purchase
Where am asset is paid over a set period of time. The asset doesn’t belong to the business until it’s fully paid.
Benefits of hire purchase
Spreads the costs over time.
Helps maintain cash flow
Limitations of hire purchase
Only available on assets such as vehicles.
Will cost the business more than buying it outright.
Define leasing
This is where a business pays to use an asset that will not belong to them
Benefits of leasing
Repair and maintenance responsibilities sits with the supplier
Spreads the costs out
Limitations of leasing
More then expensive than buying an asset outright
Assets won’t belong to the business.
Define trade credit
Where a business does not have to pay a supplier for goods immediately.
Benefits of trade credit
Delays the payments for supplies which increases cash flow
Limitations of trade credit
Only suitable for short term solution
Suppliers may offer discounts for immediate payment
Definition of grants
Funds that do not need to be payed back
Peer to peer lending
Where a business borrows for another business eland pays interest
Benefits of peer to peer lending
Terms can be negotiated
Limitations of peer to peer lending
Limited amount over a short period
Define invoice discounting
Where a supplier will offer a discounts on orders often out of loyalty
Benefits of invoice discounting
Reduces the cost of the business
Strengthens relationship with supplier
Limitations of invoice discounting
Often only available when payment is upfront, which can create cash flow issues.
