Sources of Finance Flashcards
Describe owner’s personal finance.
Includes personal savings and money borrowed from family and friends.
Advantages of Owner’s Personal Finance.
This allows the owner to keep control of the business.
It can reduce the amount to be borrowed from other sources.
Disadvantages of Owner’s Personal Finance.
It can be difficult to withdraw savings once they are invested in the business.
There is a risk that the owner could lose their savings if the business fails.
Describe Retained Profits.
A business holding back profits from previous years.
Advantages of Retained profits.
This can be used to make larger purchases, such as assets or for bulk buying.
The business doesn’t go into debt
Disadvantages of Retained profits.
A business can find it more difficult to grow if it regularly uses retained profits, especially to solve short-term cash-flow
problems.
Describe Sale of Assets.
Selling something that the business no longer needs.
Advantages of Sale of Assets.
Money can be raised from the sale of an asset to boost cash flow.
The money does not need to be repaid.
Disadvantages of Sale of Assets.
If the finance is required urgently, the business may have to sell the asset for less than it is worth.
Describe sell and lease back.
Selling an asset and leasing (renting) it back.
Advantages of sell and lease back
The use of the asset is retained, which might be essential to the business, e.g. selling and leasing back the main shop/ factory/office.
The business passes over responsibility for maintaining and renewing
equipment to the leasing company.
Disadvantages of share issue
Leasing over a long period of time can be expensive – ultimately, the business may pay back more than it received from the sale.
Describe trade credit
Allows a business to buy goods from suppliers and pay for them at a later date.
Advantages of trade credit
This allows a business to sell goods at a higher price and earn a profit before
the bill needs to be paid.
It helps a business to keep going when cash flow is poor.
Disadvantages of trade credit
Discount for prompt payment is lost.
Suppliers will be reluctant to continue to offer credit if a business does not pay
within the agreed credit period.
Describe grants.
A sum of money given to an organisation by central/local government, the EU or Prince’s trust that doesn’t have to be paid back.
Advantages of grants
These are often offered as an incentive and a way of helping a business get started or expand.
The money does not need to be repaid.
Disadvantages of grants
They can be complicated to apply for and can require the business to meet certain requirements.
Grants are usually one-off payments that are not repeated.
Describe bank loan.
A bank agrees to lend a business money for a specific purpose, for
a fixed period of time. Regular repayment instalments are put in
place.
Advantages to a bank loan
The business can budget for the repayments.
Purchases of essential equipment can be made in advance and paid back
over a number of years.
Disadvantages to a bank loan
Interest has to be repaid along with the loan amount.
Small businesses may find it more difficult to secure a loan and often need to pay higher interest rates, as they are a greater risk.
Describe a mortgage
A large sum of money borrowed from a bank or building society secured on a property.
Advantages to a mortgage
It can be paid back over a long period of time, e.g. 25 years.
The interest rate charged is often lower than the rate on a bank loan.
Disadvantages to a mortgage.
Interest has to be repaid along with the loan amount.
The mortgage provider owns the property
until the last repayment is made. This means the business could lose the property if it does not keep up the repayments.
