sources of finance Flashcards
personal savings
advantages and disadvantages
money that has been set aside and not spent by individuals or households
ad
- easy access to the money through the owners bank accounts
- no interest to pay
dis
- owner will not be able to spend it on opportunity cost
retained profit
profit which is kept back in the business and used to pay for investment in the business
selling assets
when a person or business sells assets that it owns such as equipment or vehicles it no longer uses , in order to raise finance
bank overdraft
advantages and disadvantages
a facility that will allow you to withdraw more money from your account than is available
ad
- flexible
- interest only on what is used
dis
- high interest charge
- can be recalled at short notice
trade credit
advantages and disadvantages
when businesses buy goods and services now and pay for them later
ad
- improves cash flow
- frees cash for other uses
- supplies can be used before paying
dis
- Potential loss of discounts offered for cash payments
- Only suitable as a short-term source of finance
venture capital
advantages and disadvantages
money provided by large investors to finance new products and new businesses that have a good chance to be very profitable
ad
- no interest or repayments
- usually no loss of decision making power
dis
- loss of ownership or share of future profits
loan capital
advantage and disadvantage
money sourced from financial institutions such as banks, with interest charged on the loan to be repaid
ad
- borrow large amount of money
- repaid in instalments with interest
dis
- the business will have to pay the capital back and also the interest
retained profit
ad and dis
profit which is made from business and used to pay for investments in the business
ad
- doesn’t have to be paid back and there is no interest to be paid
dis
- limited source
- conflict between stakeholders
– difficult for small firms
crowdfunding
ad and dis
using social networking to appeal to potential investors
ad
- provides funding
- gauges interest and enthusiasm
- builds excitement for the new launch of a new product
- gives you a potentially global reach
dis
- may be a waste of time which could be used to source funds elsewhere
what is internal sources of finance?
finance which is obtained within the business such as
personal savings
retained profit
sale of assets
what is external sources of finance?
finance which is obtained from outside the business such as
bank loans
venture capital
trade credit
crowdfunding
overdrafts
Revenue expenditure
The payment of an operating expense necessary to earn revenue e.g. raw materials, salaries
Capital expenditure
investment spending on fixed assets such as the purchase of land and buildings
Leasing
Renting equipment or premises.
government grants
Money given to firms by the government which does not have to be repaid.
Short term finance
Finance needed for a limited period of time, normally less than one year
Long term finance
Sources of money for businesses that are borrowed for 10 years +.
They include
bank loans
share capital (only for limited companies)
personal savings
grants
venture capitalists (external investors looking for a good return on their investment)
short-term debt
Any debt that must be paid in less than one year e.g. suppliers, utilities etc
Revenue expenditure
The payment of an operating expense necessary to earn revenue
Businesses with cash flow issues are most suited to the following types of finance:
family and friends - may help out in difficult financial times
bank loan - could be difficult to get, but is possible with a detailed business plan
overdraft - this will allow the business to gain some temporary finances
selling assets - may be used as a last resort to gain money
A growing business is most suited to the following types of finance:
retained profit - an expanding business will likely have some spare profit they can use to invest
bank loan - could be used to provide money to grow the business
new partners - a business may invite new partners to invest and help them grow the business
