Sources of finance Flashcards
Describe a bank loan
money borrowed from a bank which is paid back in instalments with interest overtime
Advantages of a bank loan
paid back in monthly instalments
Disadvantages of bank loan
interest is charged on the amount borrowed
the longer you borrow the more interest has to be paid
Describe a commercial mortgage
obtained for purchasing property and paid back over 25 years
Advantages of a commercial mortgage
paid back in monthly instalments
Disadvantages of commercial mortgage
interest is charged on the amount borrowed
if instalments not paid property can be repossessed
Describe bank overdraft
money loaned from a bank for a short period of time
Advantages of bank overdraft
interest is calculated on a short daily basis
Disadvantages of bank overdraft
any money placed in you account automatically reduce your overdraft balance
The bank can withdraw the overdraft at any time
Describe leasing
renting equipment or property to allow your business to use them without purchasing
Advantages of leasing
dont have to pay for repairs
saves large outlay of cash
equipment can be changed regularly
Disadvantages of leasing
more expensive in the long run
goods will never be an asset
property leases can be for a long period of time
Describe hire purchase
goods are immediately received and purchased by a deposit with the remaining amount paid in instalments
Advantages of hire purchase
receive goods immediately
goods paid for in instalments
the full amount is not paid upfront so helps cashflow
Disadvantages of hire purchase
deposits often required
don’t own goods until final payment is made
if instalments missed then goods can be reclaimed
Describe venture capitalists/ business capital
successful entrepreneurs invest in business ventures which are risky
Advantages of venture capitalists
benefit from experience of the venture capitalist
benefit from the contacts of the venture capitalists
poor credit ratings are often ignored by the venture capitalist
Disadvantages of venture capitalists
have to give up full ownership of your business
Describe a government grant
when money is received from the government to help set up your business to provide employment in an area.
Advantages of government grant
does not have to be paid back
Disadvantages of government grant
may have to set up in a particular area
have to meet certain criteria otherwise the grant may have to be repaid
Describe sale of assets
when assets are sold that are no longer used
Advantages of sale of assets
raise finance quickly
no interest is paid
does not have to be repaid
Disadvantages of sale of assets
may not get true value for goods
Describe retained profit
unused profits from the previous year after tax that are not given to shareholders in the form of dividends
Advantages of retained profits
does not have to be paid back
no interest rates have to be paid
Disadvantages of retained profits
can only be used once
shareholders may not agree to profit retention as it may impact the amount of profit available for their dividend payment
Describe share issue
limited companies sell shares to new or potential shareholders on the stock market that does not have to be repaid
shareholders receive a share of the profit in return for their investment
Advantages of share issue
large amounts of finance can be raised
shareholders have limited liability
finance does not have to be paid back
Disadvantages of share issue
if a profit is made then a dividend must be paid to shareholders
limitation of how many shares can be sold
share selling price can vary daily
Describe trade credit
buying raw materials and paying on credit
Advantages of trade credit
receive goods immediately
can sell the goods and use the funds to pay for the raw materials
Disadvantages of trade credit
sometimes interest is charged
Describe debt factoring
the practice of selling your debts to another company for less than the true value
Advantages of debt factoring
improved the cash flow of your business
less time spend chasing debts
do not have to employ staff to handle customer payments
Disadvantages of debt factoring
full amount of debt is not received
can damage your businesses reputation if the debt factoring company is not professional
factors will only buy debts that are likely to be paid
Describe crowd funding
the practice of funding a project or venture by raising money from a large number of people over the internet who each contribute a small amount
Advantages of crown funding
large amounts of finance can be received
also raises the profile of the cause
Disadvantages of crowd funding
failed projects risk damaging the reputation
Describe debentures for plc only
a debenture holder loans money to a company
a debenture can be an individual or another company
a fixed rate of interest and a repayment date is agreed
the debenture holder receives the interest yearly
the full amount is repaid at the end of the term
Advantages of debentures
fixed rate of interest
money is repaid at the end of the term
large amounts of finance can be raised
debenture holders are first in line to have their money repaid should the business be declared bankrupt
disadvantages of debentures
even if loss is made the debenture holder must be paid interest
debenture holders have the right to sell the business assets to have the money borrowed repaid
