Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Business Unit 5 > Sources Of Finance > Flashcards

Sources Of Finance Flashcards

1
Q

Sources of finance can be classified into: …?

A

• Internal Sources (raised from within the organisation)

• External (raised from an outside source)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What two internal sources of finance are there?

A

• Owner’s Investment

• Retained Profits

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is Owner’s Investment?

A

• Money that comes from the owners own savings

• In the form of start up capital - used when the business is setting up

• Long-term source of finance

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What are the ADVANTAGES of Owner’s Investment?

A

• Doesn’t have to be repaid

• No interest is payable

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What are the DISADVANTAGES of Owner’s Investment?

A

• There is a limit to the amount an owner can invest

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What is RETAINED PROFIT?

A

• Only available for a business which has been trading for more than 1 year

• It is when the profits made are put back into the business

• This is a medium or long-term source of finance

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What are the ADVANTAGES of Retained Profit as a source of finance?

A

• Doesn’t have to be repaid

• No interest is payable

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

What are the DISADVANTAGES of Retained Profit as a source of finance?

A

• Not available to a new business

• Business may not make enough profit to plough back

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

What are the 8 EXTERNAL sources of finance?

A

• Bank Loan
• Overdraft
• Share Issue
• Venture Capital
• Leasing
• Hire Purchase
• Factoring
• Trade Credit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What is a BANK LOAN?

A

• Money borrowed at an agreed rate of interest over a set period of time

• Medium or Long-term source of finance

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

What are the ADVANTAGES of a Bank Loan?

A

• Set repayments are spread over a period of time which is good for budgeting

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are the DISADVANTAGES of a Bank Loan?

A

• Can be expensive due to interest payments

• Bank may require security on the loan e.g a building

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What is a BANK OVERDRAFT?

A

• Where business is allowed to spend more money than is in its bank account

• Short-term source of finance

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What are the ADVANTAGES of Bank Overdraft?

A

• Good way to cover the period between money going out of and into the business

• If used in short-term it is usually cheaper than a bank loan

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

What are the DISADVANTAGES of a Bank Overdraft?

A

• Interest is repayable on the amount overdrawn

• Can be expensive if used over a longer period of time

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What is SHARE ISSUE?

A

• Suitable for a limited company

• Involves issuing more shares

• Long-term source of finance

17
Q

What are the ADVANTAGES of Share Issue as a source of finance?

A

• Doesn’t have to be repaid

• No interest is payable

18
Q

What are the DISADVANTAGES of Share Issue as a source of finance?

A

• Profits will be paid out as dividends to more shareholders

• Ownership of the company could change hands

19
Q

What is VENTURE CAPITAL?

A

• This is essentially the same as selling shares

• Difference is the money is for a risky venture

20
Q

What are the ADVANTAGES of VENTURE CAPITAL?

A

• Doesn’t have to be repaid

• No interest is payable

21
Q

What are the DISADVANTAGES of VENTURE CAPITAL?

A

• Profits will be paid out as dividends to more shareholders

• Ownership of the company could change hands

22
Q

What is LEASING?

A

• Allows business to obtain assets without the need to pay a large lump sum up front

• Arranged through a finance company

• Leasing is like renting an asset

• Involves making set repayments

• Medium-term source of finance

23
Q

What are the ADVANTAGES of Leasing?

A

• Businesses can have the use of up to date equipment immediately

• Payments are spread over a period of time which is good for budgeting

24
Q

What are the DISADVANTAGES of Leasing?

A

• Can be expensive

• The asset belongs to the finance company

25
Q

What is HIRE PURCHASE? (source of finance)

A

• Allows business to obtain assets without the need to pay a large sum up front

• Involves paying an initial deposit and regular payments for a set period of time

• Medium-term source of finance

26
Q

What is the difference between HIRE PURCHASE and LEASING?

A

With HIRE PURCHASE after all repayments have been made the business owns the asset

27
Q

What are the ADVANTAGES of Hire Purchase as a source of finance?

A

• Business can have the use of up to date equipment immediately

• Payments are spread over a period of time which is good for budgeting

• Once all repayments have been made the business will own the asset

28
Q

What are the DISADVANTAGES of Hire Purchase as a source of finance?

A

• This is an expensive method compared to buying with cash

29
Q

What is FACTORING as a source of finance

A

• Banking service which provides the business with 80% of the money invoiced to customers immediately

• Bank collects the money from the customer at a later date, takes back the 80% + a fee and then sends the rest to the business

30
Q

What are the ADVANTAGES of Factoring as a source of finance?

A

• Provides cash immediately - no need to wait for the credit period to end

31
Q

What are the DISADVANTAGES of Factoring as a source of finance?

A

• Expensive

• Not useful for retailers who give credit

32
Q

What is TRADE CREDIT?

A

• Buy Now Pay Later

• Typical trade credit period is 30 days

• Short-term source of finance

33
Q

What are the ADVANTAGES of Trade Credit?

A

• Business can sell the goods first and pay for them later

• Good for cash flow

• No interest charged if money is paid within agreed time

34
Q

What are the DISADVANTAGES of Trade Credit?

A

• Discount given for cash payment would be lost

• Businesses need to carefully manage their cash flow to ensure they will have money available when the debt is due to be paid

35
Q

Factors Affecting Choice of Source of Finance

A

• Purpose - what the finance is to be used for

• Time Period - how long it’s needed for

• Amount - how much money is needed

• Ownership and Size of the business

Business Unit 5 (5 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions