Sources Of Finance Flashcards
What is short term finance?
Aka working capital - needed for the day to day running of the business. Need sufficient cash flow to meet cash outflows.
What are the short term sources of finance?
- overdraft
- trade credit
- factoring
- hire-purchase
Whats an overdraft?
When a payment is made out of current account and it exceeds the available balance.
- interest paid on on amount overdrawn
What are the advantages of an overdraft?
- flexible so can help wit seasonal fluctuations
- easy to arrange
What are the disadvantages of an overdraft?
- borrowing costs are difficult to calculate
- interest rates higher than bank loan
What is trade credit?
Deferring payment to supplier in promise that they will pay supplier in set among of time (usually 30-90 days)
What are the advantages of trade credit?
- easy to arrange
- entise customers to buy more
- no cash required upfront so helps with fluctuations of cash flow
what are the disadvantages of trad credit?
- missing the repayment can end up in penalties and interest
- cash flow problems for suppliers
What is factoring?
Where debt is sold to raise finances. Sold to factoring company who offer a certain % of debt to business who needs funds. Will chase up debt from debtor
Whats an advantage of factoring?
- assists smoother cash flow + financial planning
- can focus on selling rather than collecting debt
- firm receives most of finance at once
What are the disadvantages of factoring?
- % lost of what’s owed
- high costs
- some customers may prefer to deal directly with company
What is hire purchase?
A way of buying assets by paying instalments over time
What are the advantages of hire purchase?
- large sum isn’t spent all at once - sum is spread
- flexible
- option to purchase at end
What are the disadvantages of hire-purchase?
- overall cost is other than buying out right/ up front
What is medium term finance?
Normally a period of between 3-10 years
What are the examples of medium term sources of finance?
- leasing
- medium-term loan
What is leasing?
A from of renting an asset, giving beneficial use without owning it.
What are the advantages of leasing?
- predictable cash flows
- asset owner carries the risk
- lower interest than bank loan
What are the disadvantages of leasing?
- more expensive (in total) than buying outright
- don’t own asset
- may have to pay up-front deposit
What is long term finance?
A period in excess of 10 years. For securing resources for long term growth. Can be done through borrowing of the issue of shares.
What are the types of long term finance?
- bank loan
- debentures
- retained profits
- shares
- government assistance
- venture capital and business angels
What is a bank loan?
Loan provided over fixed period
Rate of interest fixed or variable
Timing and amount of repayments set
What are the benefits of bank loans?
- greater certainty of funding, provided terms complied with
- lower interest rate than bank overdraft
- appropriate method of financing fixed assets
What are he drawbacks of bank loans?
- requires security
- interest paid on full amount outstanding
- harder to arrange
- startups + all n=businesses often excluded
What is retained profit?
Profit earned from trading successfully
What are the advantages of retained profits?
- felxibility
- business owners in control
- low cost
What are the drawbacks of using retained profits as a source of finance?
- danger of hoarding profits
- opportunity cost for shareholders
What are debentures?
Special type of long term loan available to plc’s.
Two types:
1st type - sells debentures to investors to raise finance (Cary a fixed IR) that the business has to pay debenture holders each year
2nd type - debentures resold to someone else if they need their money back before denture matures
What are shares as a source of finance?
Aka as equity finance. only available to a company. For plc can be traded on stock market. Shareholders entitled to dividend
What is government assistance as a source of finance?
Tax incentives
Sale of land/ property at a discount
Lower rent
Grants
What is venture capital/ business angels as a source of finance?
Individuals or firms that lend money, known as venture apical, to small/ medium sized business that require finance for start-up/ expansion.
Business angels - offer advice, contacts
Whats the risk with venture capitals?
Likely to have been declined by other sources of finance so is a gamble - high risk of failure
what is external finance?
Provided ny people or institutions outside business. Included share capital, bank loan/ overdraft, debentures, venture capital, supplier
What factors influences a businesses choice of finance?
- the length of time inv - how long it will take
- legal structure - if not company then restricted as cant issue shares
- quantitative factors - measurable
- qualitative factors - non measurable - views + opinions
- external factors - economy
- security - lack of security = less likely to be granted loans
- the current methods being used
