Sources of finance Flashcards
Internal - Retained profit
Profit kept in the business to fund future expenses
Pro’s and Con’s of Retained profit
Pro’s - no interest charges, available immediately, only available up to the amount already accumulated by the business and therefore avoids debt, no loss of ownership.
Con’s - amount available may be limited, reduces payments to shareholders which may cause dissatisfaction, once used it is not available for alternative purposes.
Internal - Net current assets
Current assets minus current liabilities shows the money available in the business to fund day to day expenditure.
Pro’s and Con’s of Net current assets
Pro’s - encourages the business to manage cash flow effectively.
Con’s - can put pressure on customers as shorter term credit terms are offered and this negatively affects relationships with suppliers if longer credit terms are negotiated, lower stock holdings can affect the firms ability to meet customer needs.
Internal - Sales of assets
Selling an item of worth owned by a business in order to achieve an immediate cash injection.
Pro’s and Con’s of Sales of assets
Pro’s - no interest charges, reduce capital tied up in assets, releasing it for other purposes, can mean disposing of an asset no longer of use to a business.
Con’s - It is likely that the amount received is not a true reflection of the asset, can increase costs in the long run if an asset needs to be leased back.
External - Owners capital
This is money invested into the business from the owners personal savings
Pro’s and Con’s of Owners capital
Pro’s - no interest payments or need to repay, high level of commitment from the owner.
Con’s - amount available may be limited, if there is more than one owner this could cause friction if everyone is not able to contribute the same amount.
External - Loans
Money borrowed from a financial institution normally for a set period of time and for a specific purpose, interest payable on the loan.
Pro’s and Con’s of Loans
Pro’s - regular pre-agreed payments making planning and budgeting relatively easy, ownership or control is not lost.
Con’s - interest charged, rates fluctuate, asset it is secured against can be seized if payments are missed, interest paid regardless.
External - Crowd funding
Involves attracting investment from a large number of speculative investors many of whom may invest relatively small amounts. Normally make use of the internet to attract investors
Pro’s and Con’s of Crowd funding
Pro’s - offers the ability to raise finance from a large number of investors, no interest paid as investors only rewarded if the business is successfully sold on at a later date.
Con’s - partial loss of ownership, no guarantee that the crowd fund will attract sufficient investment to meet the proposal.
External - Mortgages
Long term loans, around 25 years, secured against specific asset e.g. a building. Interest will be payable on a mortgage
Pro’s and Con’s of Mortgages
Pro’s - large amount of finance can be raised and repaid over a long time, ownership or control is not lost
Con’s - interest is charged on amount borrowed, rates fluctuate, secured against a asset, paid interest regardless of whether a profit is being made, not suitable for small amounts or as a short term source.
External - Venture capital
Investment from a experienced entrepreneur in return for a stake in the business
Pro’s and Con’s of Venture capital
Pro’s - finance provided by a business professional who will often offer advice and mentoring alongside investment, often risk takers and may see the potential in a high risk investment that other investors including banks may not be willing to invest in.
Con’s - partial loss of ownership and control, conflict can arise between entrepreneur and venture capitalist regarding direction and running of the business.
External - Debt factoring
Involves the selling on of a businesses debts to a third party in order to receive the cash quickly. The factor company pays the business a percentage of the money owed and takes on responsibility to chase the debts which need to be repaid.
Pro’s and Con’s of Debt factoring
Pro’s - speeds up the flow of cash into the business from debts, the factor company takes on the risk of bad debt.
Con’s - only receive a percentage of the amount owed therefore reducing profits, can give wrong impression or alienate customers.
External - Hire purchase
involves paying to use an asset in instalments to spread the cost over its useful life and hence provide a source of finance, asset remains the property of the seller until the final instalment has been paid.
Pro’s and Con’s of Hire purchase
Pro’s - avoids the need to pay lump sum for use of an asset. Regular instalments make planning and budgeting easier, spreads cost of an asset over its useful life.
Con’s - overall amount paid for use of an asset is higher then if purchased outright, only suitable for low cost assets e.g. cars not buildings.
External - Leasing
Involves paying to use an asset in instalments to spread the cost over its useful life and hence providing a source of finance.
Pro’s and Con’s of leasing
Pro’s - responsibility for maintaining and repairing asset stays with the supplier, spreads the cost over its life to avoid paying upfront.
Con’s - overall amount paid for use of an asset is likely to be higher then if purchased outright, never actually own the asset and therefore payments are ongoing.
External - Trade credit
Period of time offered by suppliers to allow customers to purchase a good or service now and pay at a later date
Pro’s and Con’s of Trade credit
Pro’s - delay the need to pay for goods and services, therefore adding cash flow, no loss of ownership or control.
Con’s - potential loss of discounts offered for cash payments, only suitable as a short term source of finance.
External - Grants
Lump sum provided to a business by the government or another organisation to be used for a specific purpose.
Pro’s and Con’s of grants
Pro’s - no need to repay and no interest charges, no loss of ownership or control
Con’s - often requires a lengthy application process, might only be rewarded if certain conditions are met.
External - Donations
Sums of money given voluntarily to a charity or social enterprise.
Pro’s and Con’s of donations
Pro’s - no need to repay and no interest charges, no loss of ownership or control.
Con’s - likely to be small amounts, unpredictable
External - Peer to peer lending
involves one business person lending money to another business person in return for interest payments,
Pro’s and Con’s of peer to peer lending
Pro’s - interest rates can be lower then lending from more traditional financial institutions, fixed rate of interest can be agreed making it easier to plan and budget.
Con’s - amount available may be limited and provided for a short period of time only
External - Invoice discounting
Reductions offered to customers making a product or service cheaper, often applied as a percentage.
Pro’s and Con’s of Invoice discounting
Pro’s - no need to repay and no interest charges, no loss of ownership or control, reduces costs to the business so increases profit.
Con’s - often available if purchases are paid in cash, which affects cash flow.
