Sources of Finance Flashcards
What are the sources of finance of the private sector?
Owner’s equity
Bank loan
Grant
Re-invested profits
Mortgage
Leasing
Hire purchase
Bank overdraft
Trade credit
Issuing shares (Ltds only)
What are the sources of finance of the public sector?
Taxation (corporation tax, income tax, VAT)
Trading activities (e.g. admission fee to leisure centre)
What are the sources of finance of the third sector?
Donations
Grants
Membership fees/Subscriptions (clubs and associations)
Trading activities (e.g. shop sales)
Describe owner’s equity
This refers to money invested by the owner/partner into the business.
Describe the advantages of owner’s equity
The money does not have to be repaid.
No interest has to be paid.
Describe the disadvantages of owner’s equity
There may be insufficient money to fund the business.
Describe bank loan
This refers to a sum of money lent from the bank which has to be repaid with interest over an agreed number of years.
Describe the advantages of a bank loan
The money can be obtained in one lump sum.
Repayments can be spread over several years so budgeting is easier.
Describe the disadvantages of a bank loan
Interest has to be paid.
Small businesses may find it hard to obtain a bank loan and may have to pay higher rates of interest.
Describe a grant
This refers to a sum of money received from the Local Council, Government or Lottery for a specific purpose.
Describe the advantages of a grant
The money does not have to be repaid.
A large amount of money can be received at one time.
Describe the disadvantages of a grant
There will be certain restrictions as to what the money can be used for.
Time consuming and complex application process.
Describe re-invested profits
This refers to profit left over at the end of the year that has not been shared with owner(s).
Describe the advantages of re-invested profits
There are no extra costs e.g. interest to be paid.
Describe the disadvantages of re-invested profits
There may be insufficient money to fund the business.
Describe a mortgage
This refers to a loan specifically for the purchase of property.
Describe the advantages of a mortgage
Amount can be repaid over a long period of time (e.g. 25 years).
Describe the disadvantages of a mortgage
Interest has to be paid.
If repayments are not made then the property may be repossessed.
Describe leasing
This refers to paying a monthly fee for the use of equipment/vehicles (asset).
Describe the advantages of leasing
Can obtain the asset without a large financial outlay.
Repairs are carried out by the leasing company as part of the agreement.
Can keep upgrading to the latest models/versions.
Describe the disadvantages of leasing
The business will never own the asset.
May end up paying more in the long run than purchasing the asset.
Describe hire purchase
This refers to buying an asset and paying it back over several months (e.g. 48 or 60 months). An initial down payment is normally required.
Describe the advantages of hire purchase
Allows businesses to buy assets without needing the full amount up front.
Once full payments have been made the asset is owned.
Describe the disadvantages of hire purchase
The asset is not fully owned until the last payment is made.
The total paid is more than the value of the asset due to interest charges.
Describe a bank overdraft
This refers to withdrawing more money from your bank account than you have available.
Describe the advantages of a bank overdraft
Useful as a short-term source of finance to overcome cash flow problems.
You are not tied into an agreement which requires repayment over several years.
Describe the disadvantages of a bank overdraft
An expensive form of borrowing with high interest charges.
Additional costs incurred if not pre-arranged with the bank.
Describe trade credit
This refers to when goods/materials can be bought from suppliers but are not paid for until a later date (e.g. 30 days credit).
Describe the advantages of trade credit
Can buy goods and sell them on before payment is required.
Provided payment is made within the agreed number of months then no interest is charged.
Describe the disadvantages of trade credit
May lose out on prompt payment discounts.
May gain a reputation as a slow payer.
Describe issuing shares
This refers to selling shares to friends and family in return for part-ownership of the company.
Describe the advantages of of issuing shares
Large amounts of additional finance can be raised.
Describe the disadvantages of issuing shares
Dividends have to be paid which reduces the retained profit for the company.
New shareholders will have a say in how the business is run (ownership is diluted).
