Sources Of Finance Flashcards
What is retained profits?
When a business saves a portion of its profits and reinvests back into the company
What are advantages of retained profits?
-no paying back interest on external borrowing so no cost
-profits belong to the company, so owner is in control
What is disadvantage of retained profits?
Relying on profit is risky, as some months a business may not make profits
What is sale of assets?
When a business sells items that they no longer need for example machinery or transport
They can then use this money to reinvest into other areas of the business
What are advantages of sale of assets?
-no paying back interest on external borrowing so no cost
-profits belong to the company, so owner is in control
What are disadvantages of sale of assets?
-may be difficult or may rake time to sell the assets
- of the finance is required urgently, the business may have to sell the asset for less than its worth
What is share issue?
-a source of finance that is only available to private or public limited companies
-businesses can decide to issue more shares in the company and obtain finance from their sale
What are advantages of share issue?
-finance raised does not need to be paid back
-large amounts of finance can be raised
what are disadvantages of share issue?
-shareholders need to be paid a dividend each year
-shareholders become part owners of the business
What is bank overdraft?
Facility that will allow you to withdraw more money from your account than is available
What is advantages of bank overdraft?
-can usually be arranged quickly which can help immediate cash flow problems
-allows the business to continue paying expenses, despite their being no finance in bank account
What are disadvantages of bank overdraft?
-can be expensive to pay back
-usually only available for small amounts of money
What is bank loan?
-fixed amounts of money that is given to a business by the bank that has to be repaid over time with interest
What are advantages of bank loan?
-can usually be arranged quickly
-loan can be repaid back over a long period of time which allows business to budget for repayments
What are disadvantages of bank loan?
-interest has to be paid back on the loan
-small businesses may find it hard to secure a loan and often need to pay higher interest rates
What is commercial mortgage?
-long term source of finance
-sum of money by borrowed from the bank which is secured against a business property and paid back in monthly instalments
What are advantages of commercial mortgages?
-mortgage is given for a long period of time
-large amounts of finance can be raised quickly
-fixed interest rates are available so organisation knows what monthly payments will be
What are disadvantages of commercial mortgages?
- interest is charged on the loan
-property can be lost to mortgage lender if repayments are missed
-variable interest rates can mean fluctuating monthly payments
-large deposit often needed
What is debt factoring?
-short term sources of finance where firms sell their unpaid customer invoices to a factoring company
-the factoring company then collects and keeps customers debts
What are advantages of debt factoring?
-time and effort is saved as the company is no longer required to recover unpaid debts as they have been passed on to the factor
What were disadvantages of debt factoring?
Finance is lost from the business as unpaid debts are sold at a reduced value
What are debentures?
-loans given to the business by individuals through the stock market
What are advantages of debentures?
-control of the business is not lost
-large amounts of capital can be raised and payed back over time
What are disadvantages of debentures?
-interest must be payed annually even if the company makes a loss
-if the business fails to make the repayments, the debenture holder can seize company assets
What are grants?
-fixed amounts of money usually awarded by the government
-given ti business on the condition they meet certain criteria
What are advantages of grants?
-doesn’t need to be repaid
-usually given in one sum
What are disadvantages of grants?
-it is a one off payment
-they can be complicated to apply for and it could be hard to meet the criteria
What are venture capitalists?
-someone who invests their own money in a company that is starting up
-usually used when there is an element of risk in the business
What are advantages of venture capitalists?
-businesses with a lower credit rating can secured finance from a reputable source
-large amounts of finance can be raised
What is a disadvantage of venture capitalists?
Part ownership of the business could be required to secure finance
What is crowd funding?
-getting small amounts of finance from a large amount of people
What are advantages of crowd funding?
-access to large amount of investors when bank see a venture as too risky
-large amount of finance can be raised and some funds are donated so there is nothing to repay
What are disadvantages of crowd funding?
A public request for investment risks your project being copied
-if the targeted amount isn’t reached the finance is returned to investors
