Sources of Finance Flashcards
define internal sources of finance
money obtain within the business and is easier to access by business already stablished
define personal funds
source of finance for sole traders that comes mostly from their own personal savings
personal funds A + D
A:
- sole trader knows exactly how much money is available
- provides the sole trader with much more control over finance
- doesnt rely on anyone else + no pay back to anyone
D:
- large risk for the sole trader since its their life savings, straining family or personal life
- if savings are not enough, might be diff to maintain the business or start it
retained profit
profit that remains after paying dividends and expenses - long term
retained profit A+D
A:
- its cheap bc no bank loans
- permanent source of finance
- owners have complete control + dont rely on financial institutions
D:
- doesnt work for start-ups bc they dont make profit yet
- if the retained profit is not enough, might be diff to keep up the business
- high retained profit = not paying enough money to shareholders
sale of assets
when a business sells their unwanted and unused assets to raise funds
sale of assets A+D
A:
- raising cash from tied up capital in unused assets
- no interest rates
D:
- doesnt work for new business/start ups bc they have no established assets
- time consuming to find costumers to sell the asset
define external sources of finance
money obtained from sources outside the business, mainly from financial institutions or individuals
share capital
money raised from the sale of shares of a LIMITED COMPANY
share capital A+D
A:
- it is a permanent source of finance, doesn’t need to be redeemed
- no interest rates
D:
- shareholders will demand dividends
- for PUBLIC LIMITED COMPANIES the ownership might change hands via stock exchange
Loan Capital
money sourced from a financial institution where interests are charged to the loan + might be variable or fixed
loan capital A+D
A:
- is accessible + can be arranged quickly for a specific purpose
- interest is spread out over a predetermined period of time = the business doesnt pay all in one lump sum.
- large orgs might negotiate interest rates (lower them)
- owners still have full control, ownership doesnt change
D:
- repayment is not optional, even if the business is making a loss
- collateral might be established before placing the loan
- no repayment = seizure of assets
Overdrafts
when a lending institution allows a business to withdraw more money than it currently has in its account + interests are placed to the overdrawn amount
overdrafts A+D
A:
- allows a business to spend more money than what they currently have + good for short term debts
- it is a flexible source of finance
- cheaper than a loan since interest only applies to the amount overdrawn
D:
- banks can request for repayment with very short notice
- since its flexible and variable, the bank might increase its interest rate
Trade Credit
agreement between businesses that the buyer of goods/services to pay at a later date -> 30-90 days
trade credit A+D
A:
- business is left with a good cash flow since they didnt pay immediately
- no interest rates
D:
- no discounts bc they are paying later
- might lead to a bad relationship between the buyer and the seller = refusing to engage in the future
crowdfunding
when a business venture/project is funded by a large amount of people, each one contributing with a small amount of money
crowdfunding A+D
A:
- Good marketing since platforms are online + people can share your project
- access to multiple investors + getting feedback and guidance
- owners are in full control of what they put out in the campaign and the amount theyre asking for
D:
- strong competition + detailed plan attack
- requirements not met = project not gonna be seen
- fees need to be paid
risk of failure
- other pathway for business having trouble with placing a loan
Leasing
when a business allows a firm to use an assets for a determined period of time w/o having to purchase it with cash.
leasing A+D
A:
- lessor takes care of the asset, pays for maintenance and repairs
- doesnt requiere high initial outlays to purchase the asset
- perfect for when u need the asset for a specific short time
D
- might turn out to be more expensive than actually purchasing the asset
- leased asset cannot act as a collateral for a business seeking a loan as an additional source of finance
microfinance providers
institutions that provide banking services for low-income or unemployed individuals/groups that would otherwise have no access to financial services.
it can change lives and give out hope to many.
microfinance A+D
A:
- promotes self sufficiency and entrepreneurship
- do not requiere a collateral
- they provide loans quickly with less formalities
- extensive portafolio of loans
D
- no legal representation = harsh recovery methods
- smaller loans
- interest rates are high
Business angels
(SHARKS)
highly affluent people who provide financial capital to small start-ups in return for ownership or share capital in their business.
business angels A+D
A
- more open to negotiation, risk taking attitude
- no repayment or interest required, they just want a ownership stake
- offer valuable knowledge = expertise + good financial capital
D
- might assume a large degree of control or ownership in the business, diluting the entrepreneurs ownership
- they might expect a substancial return of their investment in the first few years
