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business - opportunities - paper 1 > sources of finance > Flashcards

sources of finance Flashcards

1
Q

what are sources of finance ?

A

refers to where a business obtains funds from in order to conduct their activities

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2
Q

what will a business mainly use finance for ?

A
  • funding the start up of the business
  • running the business day to day
  • overcoming financial problems/shortages
  • growing/expanding the business
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3
Q

what other elements may a business need additional finance for ?

A
  • product development
  • research and development
  • buying assets (fixed and current)
  • funding patents and copyrights
  • acquiring another business
  • debt
    -cash flow problems
  • recruitment
  • growth/expansion
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4
Q

why may a start-up business find it difficult to raise finance ?

A
  • no business experience
  • banks may think that they are risky
  • no relationship with suppliers
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5
Q

why may a sole trader find it difficult to raise finance ?

A
  • cannot sell shares
  • no collateral
  • not enough capital
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6
Q

what are internal sources of finance ?

A

this is finance that is generated from inside the business itself and usually consists of several main options

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7
Q

what is owners’ capital ?

  • internal -
A

the amount that the owner of the business has invested which can be from personal savings or other sources such as : redundancy payments

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8
Q

advantages of owners’ capital ?

  • internal -
A
  • money is already within the business
  • no need to pay back on interest
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9
Q

disadvantages of owners’ capital ?

  • internal -
A
  • may not have enough
  • money may be needed more at a later date
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10
Q

what is retained profit ?

  • internal -
A

the amount of profit a company has left over after paying all of its direct costs, indirect costs, income taxes and its dividends to shareholders

  • usually for an established business
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11
Q

advantages of retained profit ?

  • internal -
A
  • no interest is paid
  • money is already available
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12
Q

disadvantages of retained profit ?

  • internal -
A
  • shareholders may be unhappy with lower dividends
  • may not have enough available
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13
Q

what is a dividend ?

A

a sum of money paid regularly (typically annually) by a company to its shareholders out of its profits (or reserves)

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14
Q

what are indirect costs ?

A

represent the expenses of doing business that are not readily identified with a particular activity - salaries

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15
Q

what are fixed costs ?

A

a cost that does not vary with output - rent

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16
Q

what is working capital ?

  • internal -
A

the capital of a business used in its day-to-day trading operations and represents the business operational efficiency and short-term financial health

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17
Q

how can cash be generated from working capital ?

A
  • cutting stock levels
  • chasing up debtors
  • delaying payments to creditors
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18
Q

problems with a business reducing its stock levels ?

A
  • may have a lack of stock than what is needed
  • cant meet unexpected demand
  • cant benefit from economies of scale
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19
Q

problems with a business chasing up payments from debtors (customers) ?

A
  • may lose them as a customer
  • bad reviews
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20
Q

problems with a business delaying payments to creditors (suppliers) ?

A
  • wont receive anymore supplies
  • bad working relationship
  • can damage reputation
  • can get sued
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21
Q

what is sale of assets ?

  • internal -
A

an established business has assets that can be sold to raise cash

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22
Q

what is divestment ?

(links to sale of assets)

A

when a business sells an associated company

  • only relates to larger businesses
    (kraft selling cadburys)
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23
Q

problems with selling an asset such as land to raise finance ?

  • internal -
A
  • the value increases over time
  • could have been used in the future in order to expand
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24
Q

what is sale and leaseback of assets ?

-internal -

A

an asset that is previously owned by the seller is sold to a finance business and then leased back for a period of time

  • asset is brought back in instalments with interest added
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25
advantages of sale and leaseback of assets ? - internal -
- can still use the asset but does not own it - can continue using a vital asset so the business shouldn't be disrupted
26
disadvantages of sale and leaseback of assets ? - internal -
- rent will increase
27
factors that may influence the method of internal finance that a business chooses ?
- wealth of the owner - how much money is needed - assets they need to sell
28
family and friends ? - external -
capital can come from family and friends of the entrepreneur - often used for a small business
29
advantages of family and friends ? - external -
- less risky - no interest payments
30
disadvantages of family and friends ? - external -
- can damage relationships
31
what is trade credit ? - external -
the business obtains goods or services from another business and pays for these after a set period of time : 30 days, 60 days ect. - a very simple form of external funding - no interest is added as long as the business pays the supplier on time
32
advantages of trade credit ? - external -
- short-term flexibility - more cash to use in the immediate future
33
disadvantages of trade credit ? - external -
- if not paid on time interest may be added - can be difficult for new businesses
34
what is a bank overdraft ? - external -
the bank allows the firm to overdraw up to an agreed amount of money to provide flexibility when needed - commonest form of borrowing for the business - effective short-term source of finance
35
advantages of a bank overdraft ? - external -
- flexibility for a cash flow problem - quick to arrange
36
disadvantages of a bank overdraft ? - external -
- interest is paid - has to be repaid within a short amount of time
37
what is a debenture ? - external -
a type of long-term business debt not secured by any collateral a funding option for companies with solid finances that want to avoid issuing shares and diluting their equity (ownership strength) usually only used by large organisations that are able to pay back the debt : the government
38
advantages of debentures ? - external -
- debt is not secured by collateral of the business - able to raise large amounts of finance : can fund expansion - debentures do not always have to be paid back and can be held for years
39
disadvantages of debentures ? - external -
- not available to many businesses - have to pay fixed interest
40
what is factoring ? - external -
a factoring company will provide a firm with 80% of its invoiced sales within 24 hours it then provides the other 20% - minus a fee - when the debt is collected from the company (a popular way to finance small rapidly growing businesses or those with cash flow shortages)
41
advantages of factoring ? - external -
- can get money quickly - can give you flexibility with cash flow
42
disadvantages of factoring ? - external -
- time consuming to arrange - customers may be unhappy
43
what is loan capital ? - external -
offered by banks with medium or long-term terms, they often have a variable or fixed interest rate : depending on the agreement banks will only lend if they are confident that the loan will be repaid likely to ask for collateral
44
advantages of loan capital ? - external -
- large amounts of money can be borrowed - good for business budgeting
45
disadvantages of loan capital ? - external -
- interest is added - if repayments are not paid it can affect credit history
46
why is unlimited liability an important factor to consider when taking out a loan ?
can affect your family members just as much
47
what is leasing ? - external -
a contract is signed committing the business to pay a monthly sum for a number of years and this enables them to use the asset without the capital expenditure - common way to finance the acquisition of new fixed assets
48
advantages of leasing ? - external -
- cost of asset is spread over time
49
disadvantages of leasing ? - external -
- could be more expensive in the long run
50
what is venture capital ? - external -
a method of getting outside investment for businesses that are unable to raise finance through other standard methods venture capitalists invest in smaller riskier companies for part-ownership in the business
51
advantages of venture capital ? - external -
- gives them an opportunity to have some external finance
52
disadvantages of venture capital ? - external -
- they want a large share of profit
53
what are grants ? - external -
amounts of money available to businesses and they do not have to be paid back e.g. princes trust a business must meet the criteria which can be rigorous so they must meet standards
54
advantages of grants ? - external -
- no need to repay
55
disadvantages of grants ? - external -
- limited funds available
56
what are mortgages ? - external -
a long-term loan from a bank or building society which is used for land or property - secured against the loan interest is added onto the amount that is borrowed can be up to 30 years in some cases
57
advantages of mortgages ? - external -
- structured payments over a long period of time
58
disadvantages of mortgages ? - external -
- large sums of interest are charged - can take a long time to repay
59
what is hire purchase ? - external -
a legal agreement where the business pays for the asset in instalments over a fixed period of time once all of the payments have been made, the business owns the asset - often used by smaller businesses to buy plant and machinery
60
advantages of hire purchase ? - external -
- flexible method - helps the business cash flow
61
disadvantages of hire purchase ? - external -
- paying interest - can be taken from you if you cannot keep up with repayments

business - opportunities - paper 1 (2 decks)

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