Sources Of Finance Flashcards
What is owners capital
Money introduced by the existing owner of the business
Advantages of owners capital
No interest is included or repayments have to be made
No need to profit with partners
Disadvantages of owners capital
There may not be enough cash available from the current owner
Slow way of financing expansion-> May miss out on profits
What is partners capital
When the business changes from a sole trader to a partnership, new partners are created with the business
Advantages of partners capital
No interest is included or repayments have to be made
New partners can add expertise to the business
Disadvantages of partners capital
Control & profits must be shared with partners
What are ordinary shares
Shares that are issued by limited companies. They can’t be issued by sole traders or partnerships
Advantages of ordinary shares
- No interest or repayments
- Dividends on ordinary shares depend on what the company can afford
- Less gearing
Disadvantages of Ordianry Shares
Large amount of payments for dividends may damage cash flow
Loss of control if over 50% of the company is sold to shareholders
Parts of profits have to be shared between shareholders
What are debentures
Long term loans to a company that are secured on the assets of that company
Debenture holders receive a fixed amount of interest each year
They are repaid in full at the agreed date
Long term external source of finance
Advantages of debentures
No loss of control of the company
No repayments at all for several years
After an agreed date there may be no more need for interest or repayments to be made
Disadvantages of debentures
Large repayments in one lump sum can damage cash flow at the time
Interest is payable whether the company can afford it
What are bank loans
Fixed amounts of income that must be repaid plus interest over a stated amount of time
Advantages of Bank Loans
No more repayments after a set period of time
No loss of ownership of the business
No large lump sum repayments which is good for cash flow
Disadvantages of Bank Loans
Interest is an additional cost to the business
Repayments must be made whether or not the business can afford them
Usually needs security
What are Mortgages
It’s a bank loan that is used to buy property and is secured for that property
It is a long term source or finance
Advantages of mortgages
No loss of ownership in the business
No more repayments after a set period of time
Monthly repayments are an affordable way of buying property
