Sources of finance Flashcards
What is Long term finance
Finances that support the whole business over many years
What is medium term finance
Finances major projects or assets with a long-life
What is short term finance
Finances day-to-day trading of the business
Example of long term finance
Share capital, retained profits
Example of medium term finance
Bank loans, leasing
Examples of short term finance
Bank overdraft, short term bank loans
Why does a start up business find it harder to source finance
The business is new and unproven and therefore has much higher risk to potential finance providers
What is owners funds, P and C
Money out into the business by the owner
P- No need to pay interest on the money.
C- Owner may not have enough funds to meet the needs of the business.
Could have been invested elsewhere, earning a higher profit.
what are retained profits, P and C
Money kept in the business by the owners.
P- No need to pay interest on the money.
C-Could have been invested elsewhere, earning a higher profit.
-Business may not have enough retained profit to meet its needs
Selling assets, P and C
Items owned by the business are sold and the money made is used to finance the business.
P- The business is using money it already has-so no need to take loans or pay any interest.
C- The business has to have something worth selling for this to be an option.
-The business may sell something they later need.
what is overdraft, P and C
The bank allows the business to draw more money from their bank account than what they actually have in it.
P- Very quick to arrange
-A good short term solution to a cash flow problem.
C-Only suitable for smaller amounts and has to be repaid within a short amount of time.
Interests are paid.
What is Trade Credit, P and C
Items are bought from suppliers on a ‘buy now pay later’ basis.
P-Gives business more cash to use in the immediate future.
C- Can only be used to buy certain goods.
-Bills usually have to be settled within 30,60 or 90 days.
what is debt factoring, P and C
Company sells a debt it is owed to a debt factoring company who pay the business a smaller sum than they were owed.
what is debt factoring, P and C
Company sells a debt it is owed to a debt factoring company who pay the business a smaller sum than they were owed.
P-Allows business to get money for debts that might otherwise never have been paid.
- Saves the business chasing customers for money owed.
C- Time consuming to arrange.
- Business receives less money than it was originally owed, affecting profitability.
What is leasing, P and C
Used to help obtain new equipment e.g cars, the business rents the item from its owner.
P- Cost of asset is spread over its life.
-No need to find a lump-sum of money to purchase it.
C-May be more xepsnive in the long run than buying the asset.
What is venture capital, P and C
Venture capitalists invest in small, risky businesses
P- Can raise money from them even when banks refuse to lend to the business
C-Risky for the venture capitalist.
-The VC may want some control over the business operations.
What is a hire purchase, P and C
An item bought on finance, repayments are made each month until the final payment when the item becomes the property of the firm.
P-Flexible method- can hand back the item if no longer required.
C- High interest often charged
-Item doesn’t belong to the business until end of term.
Positive and negatives of government grants
p- No need to repay the grant.
N- Limited funds available, restrictions on what the money can be used for.
What is a mortgage, P and C
Long term loan provided by a bank in order to buy a property.
P-Only method available to buy a property
C- Large sums of interest.
what is issuing shares, P and C
A share in the business is sold to an individual or another business. This money then used to purchase assets.
P-Cheaper than a loan, no need to repay the money invested.
C- Have to pay the share holders a share of future profits.
Limitations of cash flow forecast
Based on future inflows and outflows therefore may be inaccurate.
Demand may be over or under estimated
What is limited liability
An investors financial commitment is limited to the total amount invested or praised in share capital
What is unlimited liability
The owners of a business are responsible for the total amount of debt of the business
