Sources of Finance Flashcards
Name all the Sources of Finance and which are short-term and long-term?
Short - term: Overdrafts, Trade Credit, Crowdfunding
Long-term: Personal savings, Venture Capital, Share Capital, Bank loan, Retained Profit
What is retained profit?
When a business uses its already existing profit
What are the pros and cons of retained profit?
Pros: 1. No financial cost 2. No control/share has to be given up
Cons: 1. Conflict with shareholders as their is less dividends 2. Usually limited amount therefore slower growth
What is an overdraft?
This involves making an arrangement with the bank to allow a business to keep spending even when the bank balance is below 0.
What are the pros and cons of an overdraft?
Pros: 1. Quick and simple to organise 2. Can be bespoke to the business’ needs e.g a seasonal business 3. No control of the business is given up 4. Interest is only paid on the amount below 0 and only during that time
Cons: 1. Persistent usage lowers credit rating resulting in the business less likely to get a loan in the future.
What is trade credit?
When you buy components from suppliers but pay later. Often 30-60 days
What are the pros and cons of using trade credit?
Pros: 1. Cheap form of short-term finance (cheaper than overdrafts and TC has interest free periods) 2. Simple to arrange and maintain if the terms are met 3. No control of the business is given up
Cons: 1. Risk of spoiling relationship with suppliers 2. Large fine if you pay late
What are personal savings?
When an entrepreneur uses personal finances such as cash in bank accounts or less liquid assets such as money in stocks
What are the pros and cons of using personal savings
Pros: 1. No financial cost on the business 2. Easiest + quickest source of finance.
Cons: 1. Likely to be limited 2. If the business does not make an early profit, financial pressures on entrepreneur and loss of well-being
What is venture capital
Equity (ownership) type of finance. This is offered my a venture capitalist willing to take a chance on a small-medium business in return for significant shareholding in the business
What are the pros and cons of venture capital?
Pros: 1. No repayment required 2. Reduces entrepreneur’s risk
Cons: 1. Have to give up significant shareholding which could lead to limited decision making or loss in contol
What is share capital?
When a limited company offers shares in exchange for a payment (people who buys these shares are shareholders).
What are the pros and cons of share capital?
Pros: 1. No interest, you keep the payment and don’t have to pay back. 2. If plc, has opportunity to source extremely large amount of capital through the stock exchange.
Cons: 1. Have to give up shares therefore may lose control 2. Expected to pay dividends to shareholders.
What is a bank loan?
When a business borrows a sum of money from the bank and pays it back with interest over an agreed period of time.
What are the pros and cons of a bank loan?
Pros: 1. no shares in business needed to be given up - keep control 2. Interest rates may be low so overall costs are low. 3. Able to bespoke to business needs e.g repayment terms.
Cons: 1. Assets will be taken if you fail to repay. (Unless ltd/plc) 2. No flexibility - have to stick to repayment terms.
