Sources of Finance Flashcards
Why do businesses need finance?
To buy fixed assets
What are 2 examples of fixed assets?
Factories & Machinery
What is internal finance?
Money within the business
What is external finance?
Money that comes from sources outside the business
What does the source of finance depend on? 3 things
The legal structure of the business
Amount of money required
Level of risk involved
What is retained profit?
Profit that can be retained and built up over the years for later investment
What is a advantage of retained profit?
Don’t have to pay interest on the money
Why may shareholders object to the method of retained profit?
May wish to receive profits as dividends
What is rationalisation?
When managers reorganise the business to make it more efficient
How can business rationalise?
Selling some of assets to generate capital
What is a disadvantage of selling assets?
That the business no longer owns and leasing is another cost.
What is an overdraft?
Where a bank lets a business have a negative amount of money on their account
What is a advantage of a overdraft?
Easy to arrange and flexible
What is the main disadvantage of a bank overdraft?
High rates of interest - can also be a fixed charge
Is bank overdrafts internal or external source of finance?
External
What is debt factoring?
When banks and other institutions take unpaid invoices off the hands of the business and give cash to the business
What is a advantage of debt factoring?
Instantly get money they are owed
What is a disadvantage of debt factoring?
The debt factoring company keeps some of the money owed as a fee
Is debt factoring internal or external source of finance?
External
What is a bank loan?
Businesses can borrow a fixed amount of money and pay it back over a fixed period of time with interest
Are loans good long-term or short-term?
Long-term for start-up businesses
What are 2 advantages of bank loans?
Guaranteed the money for the duration of loan
Interest charges lower than an overdraft
What are the 2 disadvantages of bank loans?
Difficult to arrange
Keeping up repayments may be difficult
Who is share capital available for?
Limited companies
Is bank loans internal or external?
External
What is share capital?
Money raised by selling shares in the business
What is an advantage of share capital?
New shareholders can bring additional expertise to the business
What is the disadvantage of using share capital?
Original owner no longer owns all of the business
What is venture capital?
Funding in the form of share or loan capital that is invested in a business that is thought to be high risk.
Who are venture capitalists?
Professional investors
What is crowdfunding?
A method of financing a business using contributions made by a large number of people.
Is crowdfunding external or internal?
External
Is share capital external or internal?
External
