Sources of Finance Flashcards
What is an Overdraft?
When the business makes payments with money not available.
What are the advantages and disadvantages of an Overdraft?
+Business only pays interest when overdraws
+Quick and easy to arrange
-Difficult to predict cost of borrowing
-Debt can increase quickly if not fully paid back
What is a Bank loan?
A busiess applies to lend a set amount of money from the bank.
What are the advantages and disadvantages of a Bank loan?
+The business and bank enter the agreement knowing the cost and interest
+No additional fees
+Helps cashflow planning
-Assets at risk
-Early repayment fees
-Takes long time to set up
-No guarantee for the business of getting it
What is Owners Capital?
The owner invests their own money into the bank.
What are the advantages and disadvantages of Owners Capital?
+Low risk option
+Shows willingness
-Owner can lose their money
What is Trade Credit?
They pay for goods/services at a later date (buy now pay later).
What are the advantages and disadvantages of Trade Credit?
+Allows the business to get their products quicker before they have the money for it
+Very easy to set up
-Business can lose good suppliers if the fail to pay their bill on time
What are Retained Profits?
A business makes a net profit and reinvests this profit back into the business.
What are the advantages and disadvantages of Retained Profits?
+Don’t have to be repaid
+No restrictions on how profits are spent
-Can cause disagreements between shareholders
What is Share Capital?
Finance is raised by selling shares in the business to investors who become shareholders.
What are the advantages and disadvantages of Share Capital?
+Don’t cost anything
+Full control
-Future profits are shared
-Owners share reduces
What is Venture Capital?
Investment of money into a business in exchange for an agreed share.
What are the advantages and disadvantages of Venture Capital?
+Available for businesses that can’t get bank loans
-Typically takes 3-6 months
-Can get neglected
-More equity (value of their stake)
What is Crowdfunding?
People contribute money into a business idea.
