Sources Of Finance Flashcards
what do businesses need financing for
Starting up
Everyday running of the business
Expansion
Internal growth
Take overs
Equipment/machinery
what is a short term of finance
paid back within one year
what is a long term of finance
paid back over a period of time greater than one
year
what is internal source of finance
Internal sources of finance come from within the
business.
This is the finance or capital which is generated internally by the business.
how can a business internally finance its business
Retained profit
Net current assets
Sale of assets
how is retained profit a source of finance
When a business makes a profit it can decide whether to take that money out of the business as a salary or a dividend
similarly they can decide to reinvest it back into the business to expand or buy new equipment etc.
give advantages of using retained profit as source of finance
no interest charges
available immediately
avoids debt
no loss of ownership
give disadvantages of using retained profit as source of finance
Could cause shareholder dissatisfaction as dividend
payment would be reduced
Once used it cannot be used for other purposes
Amount available may be limited
how are net current assets a source of finance
If you have positive net current assets then this can be used by the business to fund day to day expenses.
Net current assets are current assets minus current liabilities.
give advantages of using net current assets as a source of finance
Quick way of raising money. Selling off inventory reduces the costs related to holding it
Encourages the business to manage its cash flow
give disadvantages of using net current assets as a source of finance
may have to accept a lower price for its inventory
Holding less stock could impact availability
how are sale of assets a source of finance
A business can sell assets that they have in order to
receive a cash injection.
For example the business could have land, property or machinery that it could sell and then use that cash to invest in something else that may be more useful to the business.
give advantages of using sales of assets as a source of finance
Good way of raising funds from assets no longer needed
Reduces capital tied up in useless assets
give disadvantages of using sales of assets as a source of finance
May not receive full value of the asset if a quick sale is
needed
If the asset is needed then costs could increase to lease a
similar asset back
what are external sources of finance
money that comes from outside a business.
When a company needs a lot of money and its
internal sources of finance are exhausted, the
company can look to external sources for that
finance.
what are the different types of sources of finance
internal and external
how is owners capital a source of finance
owner’s personal finances and is used to
finance the business.
give advantages of owners capital as a source of finance
No interest
payments
No repayment
schedule
No loss of
ownership
give disadvantages of owners capital as a source of finance
Limited amount available
Personal finances are at
risk
Could cause friction
between owners if all are
not able to contribute the
same amount
how is a loan a source of finance
bank loan is money lent to an individual or business that is paid off with interest over an agreed period. Usually this rate of interest is fixed.
This means that the business knows in advance what the cost of borrowing will be and what monthly repayments will be required. This allows the business to manage their cash flow.
give advantages of loans as a source of finance
Easy to budget as repayments are
pre-arranged
No loss of ownership
give disadvantages of loans as a source of finance
Interest charged
Usually secured against an asset that
could be seized if loan is not repaid
Show financial statements to banks to
secure the loan
how is crowdfunding a source of finance
involves many people investing small amounts of
money in a business, usually online.
Commonly used crowdfunding websites include Crowdfunder, GoFundMe and Kickstarter.
provides opportunities for individuals to start up a business
even if they don’t have access to other sources of funding.
It can be difficult to reach the funding target.
give advantages of crowdfunding as a source of finance
No interest paid
Finance is received from a number of investors
Gauges peoples interest in the business
give disadvantages of crowdfunding a source of finance
Someone could steal your idea from the crowdfunding platform
May not reach your crowd funding target as interest in
the business may not be there
Partial loss of ownership
how is mortgage an external source of finance
long term source of finance. It is a sum of money borrowed from the bank that is secured against a property and paid back in instalments, usually over a long period of time I.e. 25 or 30 years.
give advantages of using mortgage as an external source of finance
Large amounts of finance an be acquired and then repaid over a long period of time
No loss of ownership or control
give disdavantages of using mortgage as an external source of finance
Interest charged on amount borrowed
Secured against asset that could be seized
Not suitable as a short term source of finance
how is venture capital an external source of finance
money invested by an individual or group that is willing to take the risk of funding a new business in exchange for an agreed share of the profits.
Venture capital is usually used when there is an element of risk with the
business.
give advantages of using venture capital as an external source of finance
Finance is made available along with advice and mentoring
Finance may be easier to obtain as venture capitalists are
usually high risk high reward people
give disadvantages of using venture capital as an external source of finance
Loss of ownership and control
Conflicts may occur over the direction of the business
how is debt factoring an external source of finance
business selling their outstanding invoices to a third party at a discounted price in order to bypass the hefty waiting times which are associated with invoice payments.
This means they receive the money they are owed quickly however it comes at a cost as the get a discounted amount from the debt factoring company.
give advantages of using debt factoring as an external source of finance
Immediate cash flow: Debt factoring provides immediate cash to the business, which can
help to improve its liquidity and finance its ongoing operations.
No debt incurred: does not create additional debt for the business, as the cash is obtained by selling accounts receivable.
Improved creditworthiness: can improve the creditworthiness of the business by providing it with immediate cash flow to pay its bills and debts.
give disadvantages of using debt factoring as an external source of finance
may provide limited funding, as the amount of cash that the business can obtain is typically limited to a percentage of the value of the accounts receivable.
Reputation risk: can damage the reputation of the business, as customers may view the sale of accounts receivable as a sign of financial distress.
How is hire purchase an external source of finance
Give advantages of using hire purchase as an external source of finance
Give disadvantages of using hire purchase as an external source of finance
How is leasing an external source of finance
Leasing is a way of renting an asset that the business requires, such as a coffee machine.
Monthly payments are made, and the leasing company is responsible for the provision and upkeep of the leased item.
Unlike hire purchase the item is not owned at the end of the payments by the business.
Give advantages of using leasing as an external source of finance
agreements are generally flexible, and businesses can negotiate terms such as payment schedules,
payments are typically fixed, allowing businesses to budget and forecast more accurately.
allows businesses to transfer the risk of owning and maintaining the asset to the lessor, freeing up time and resources for other business activities.
requires a lower upfront cost than purchasing the asset outright, allowing businesses to conserve cash and invest it in other areas of the
business.
Give disadvantages of using leasing as an external source of finance
Likely to cost more than buying outright due to interest charges and other fees
assets are not owned by the business, so the business has limited control over the asset and may face restrictions on how it can be used.
Define trade credit
source of finance allows a business to obtain raw materials and stock but pay for them later.
Trade credit must be agreed with a supplier and forms a credit agreement with them.
What are the terms and conditions of trade credit
credit limit - the maximum amount of credit available to the business.
credit period - the length of time the business has to pay what is owed, usually 30, 60 or 90 days
frequency of payment - how often payment is required, usually monthly
method of payment - the way in which the business makes payment
retrospective discount - a discount given when the business has purchased a certain amount of stock or raw materials
Give advantages of using trade credit as an external source of finance
trade credit does not involve interest charges, making it a cost-effective way for businesses to access short-term financing.
can help businesses manage their cash flow by
allowing them to defer payment until a later date.
Regular use of trade credit can help businesses build strong relationships with their suppliers,
which can lead to other benefits such as preferential pricing and faster delivery times.
Give disadvantages of using trade credit as an external source of finance
typically limited in terms of the amount of credit that suppliers are willing to extend to the business
Businesses may be limited in their choice of suppliers if they have limited credit history or poor payment track record.
if payments are not managed effectively, it can impact the business’s cash flow
negatively.
If the business is unable to make payments on the trade credit, it can damage its relationship with its suppliers and lead to a loss of credit in the future.
How are grants an external source of finance
A grant is a fixed amount of money usually awarded by the government, EU (European Union) or charitable organisations.
Grants are given to a business on the condition that they meet certain criteria such as providing jobs in areas of high unemployment
Give advantages of using grants as an external source of finance
Being awarded a grant can improve a business’s reputation and credibility with customers, suppliers, and investors.
Grants can provide funding for research and development, allowing businesses to explore innovative ideas and technologies.
grants are non-repayable, and businesses do not have to worry about repaying the funds they receive/ no interest payments
Give disadvantages of using grants as an external source of finance
grant application process can be time-consuming and complex, requiring detailed information and supporting documentation.
Grants are typically provided for specific projects or activities and cannot be used for general operating expenses.
can sometimes alienate customers who may feel uncomfortable dealing with another business or pressured by aggressive lending companies.
Grants are highly competitive, and businesses must demonstrate that they meet the criteria for funding.
How are donations an external source of finance
an extremely important source of finance for a non profit organisation such as a charity or social enterprise.
Donations are relied upon for the continual running and day to day upkeep of such organisations.
funds given voluntarily by individuals or organisations to support the work of a non-profit or social enterprise.
Give advantages of using donations as an external source of finance
non-repayable, and non-profit organisations and social enterprises do not have to worry about repaying the funds they receive.
can come from members of the community who believe in the mission of the organisation, and can help build support and awarenesorganisationswork.
Donations can be used for a variety of purposes, giving non-profits and social enterprises flexibility in how they allocate the funds they receive.
Give disadvantages of using donations as an external source of finance
Donors may place restrictions on how their funds can be used, limiting the flexibility of non-profits and social enterprises.
Non-profits and social enterprises may need to invest resources
into fundraising and donor management to solicit and track donations.
Donors may experience “donor fatigue,” where they become less willing to donate over time, particularly if they are solicited frequently.
uncertain, and non-profits and social enterprises cannot rely on them as a consistent source of funding.
how is peer to peer lending an external source of finance
a way for people to lend money to individuals or businesses.
The lender lends their money to an organisation or individual. In return the lender receives interest on top of the amount lent out.
Give advantages of using peer to peer lending as an external source of finance
provide access to finance to individuals and businesses who may have difficulty obtaining loans from traditional sources.
can offer competitive interest rates compared to traditional loans, making it an attractive option for borrowers.
Give disadvantages of using peer to peer lending as an external source of finance
not as tightly regulated as traditional financial institutions, which can create risks for both borrowers and lenders.
carries the risk of borrower default, and lenders may not receive the full amount of their investment if a borrower is unable to repay the loan.
How is invoice discounting an external source of finance
invoice discounting is a form of short-term borrowing against your outstanding invoices. It is usually used to help improve a company’s working capital and cash flow position.
These companies will lend you up to 95% of the value of the invoices, paying you the money in a matter of days rather than weeks. Once you receive payment from your customers, you pay back the loan
Give advantages of using invoice discounting as an external source of finance
provides immediate cash for a business, improving its cash flow position and allowing it to invest in growth opportunities.
can be flexible, allowing a business to access funding as and when it is needed, without having to apply for a loan or line of credit.
can be confidential, allowing a business to maintain control over its relationship with its customers and avoid the negative perception associated with traditional debt financing.
can improve a business’s credit rating by providing it with a more stable cash flow and reducing its reliance on bank loans.
Give disadvantages of using invoice discounting as an external source of finance
carries the risk of non-payment, as the third
party purchasing the invoices may not be able to collect payment from the customers.
can reduce the business’s relationship with its customers, as the third party purchasing the invoices may have different collection practices and policies than the business itself.
can be a complex process, requiring a significant amount of administrative work and documentation.
can carry high fees and interest rates, reducing the amount of funding available to the business.
