Sources of finance Flashcards
What is 3 types of internal source of finance ?
- owners capital
- retained profit
- sale of assets
What are the advantages and disadvantages of owners capital?
Advantages
- retain all control
- no interest payment to make
- no borrowing
Disadvantages
- limited funding as high costs are needed
- cash may be needed for personal use
- risk of bankruptcy
What are the advantages and disadvantages of retained profit?
Advantages
- no interest to be paid
- this provides a buffer for potential funds and expenses for growth
- available instantly
Disadvantages
- money is within the business so no interest will be earned on it
- made from reinvested profits, so loss of profit for owner
- having to return profits to shareholders means that it is limited
What is the advantages and disadvantages of sale of assets?
Advantages
- established businesses can efficiently sell unwanted machinery that they no longer require
Disadvantages
- loss of asset can lead to decrease of productivity
- smaller business unlikely to have unwanted assets due to machinery helping them grow
What is the advantages and disadvantages of a bank loan?
Advantages
- money becomes immediately available if you are successful in gaining it
- payments are made monthly which can help with budgeting and cash flow
- lower interest rate than an overdraft
Disadvantages
- interest must be paid back, which could be more than was borrowed
- difficult to obtain for small businesses, unless security is offered
- if loan is unable to re repaid or maintained, business or personal assets could be taken
What are the advantages and disadvantages of an overdraft ?
Advantages
- interest must only be used when overdraft is used
- useful for short term liquidity problems
- it is flexible and is only needed to be used when needed
- good for seasonal business when they have poor cash flow
Disadvantages
- when overdraft is used , interest can be very high
- limit can be very low for small businesses
- may have an arrangement fee
- banks can immediately ask for it to be repaid
- can be withdrawn at short notice
- higher interest than bank loan.
What are the advantages and disadvantages of trade credit?
Advantages
- can be seen as an interest free way of gaining finance from 30-90 days
Disadvantages
- late repayment can lead to bad reputation , suppliers may stop supplying you
- suppliers often lower prices for early repayment
What are the advantages and disadvantages of leasing?
Advantages
- maintenance and repairs are included
- leases are often easier to obtain than other sources of finance
- equipment can be updated regularly
- payments can be made over a long period of time so can have less of a negative impact on the cash flow, and predictions can be made easier
Disadvantages
- can be very expensive after a long period of time , even more than purchasing the product initially
- business never actually owns the product, can be quickly repossessed
What is the advantages and disadvantages of hire purchase?
Advantages
- at the end of the hire purchase period , the business will own the product
- finance houses that give out hire purchases are less selective than other sources of finance so they are easier to obtain
- useful for machinery that is needed to be obtained quickly
Disadvantages
- interest rates are usually very high
- the item is never fully owned until the last repayment , if the business was to fall behind in repayments then the item can be quickly repossessed.
- service charges are required when paying for instalment’s
What are the advantages and disadvantages of a mortgage
Advantages
- payments are made over a period of time so they have less of a harsh impact on cash flow
- because the security is offered to the lender ( personal assets ) then the interest rates are lower
- predictable costs which can help with cash flow and budgeting
Disadvantages
- failure to make repayments mean that the property will be repossessed by the lender
What are the advantages and disadvantages of debt factoring?
Advantages
- accounts owed by customers are quickly turned into cash
- business can focus on selling debts rather than collecting them
Disadvantages
- discount offered to the factoring company is a high cost
- customers may feel their relationship has changed
What is debt factoring
-A way a business can raise cash by selling their sales invoices (the cost of the products purchased, or services rendered to the buyer) to a third party (a factoring company) at a discount. The reason the third party would purchase debts is, so the third party can get a profit in the long run.
What is venture capital?
Venture capital is a type of private equity financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. Like Dragons den, however they are involved in the business, venture capitalists are not.
