Sources Of Finance Flashcards
What is a grant?
A fixed sum of money given to the business by some other agency normally a government body, to be used for a specific purpose
What is a bank overdraft?
Money a business can take out of its account when it’s amount balance is at zero. They are required to agree with this with the bank in advance and it will often cost them more than a bank loan.
What is trade credit?
A supplier will deliver supplies (raw materials) to the firm and allow them to pay for the goods at a later date
What is factoring
If a business gives trade credit to their customers and they fail to repay the business, it often means the business can’t repay their own debts. In this situation a business can sell the debt that a customer owes to a third party for a reduced cost
What is hire purchase
A firm will hire equipment and pay for it in instalments. After the last payment the firm takes ownership of the good.
What is leasing
The firm rents a building of a piece of equipment for an agreed period of time
What is a bank loan
A fixed sum of money given to the business by the bank which could be repaid in fixed instalments over a specific period of time with interest added.
What is a mortgage?
This is a Loan given to firms who wish to purchase premises and is repaid in instalments with interest.
What is owners savings
This is the funds saved by the owner and interested in the business
What is share issue
The firm releases more shares in the firm to existing or prospective shareholders. This is ONLY used for a LTD/PLC
What is a venture capitalist
These are private investors who proved finance where banks decide it is too risky
What is debenture
Where a group of companies will give a Plc a long term loan to be repaid with fixed interest for a period of time. The full amount is then repaid
What is a sale of an asset?
The firm will sell off a piece of equipment that has not been used eg machines
What are the advantages and disadvantages of a sale of an asset?
Adv
Don’t have to borrow money or repay interest.
Disadv
Once sold asset you no longer have it
What are the advantages and disadvantages of a grant
Adv
Does not have to be repaid
Disadv
Comes with conditions attached that you are required to fulfil. If not then you have to give it back
What are the advantages and disadvantages of a bank overdraft
Adv
Helps firm deal with cash flow issues as you can take money out of their account when balance is zero.
Disadv
The bank can withdraw facility whenever they want. Can work out more expensive than a loan due to interest rate
What are the advantages and disadvantages of trade credit
Adv
Helps with cash flow as business don’t need to pay for goods upfront
Disadv
Normally business loses out on discounts for immediate payment
What are the advantages and disadvantages of factoring
Adv
Helps businesses cash flow as they receive advance payment of invoice
Disadv
Business doesn’t receive full amount of original invoice of factor
What are the advantages and disadvantages of hire purchase
Adv
Business receives item up front to use whilst they are making instalments
Disadv
Business doesn’t own item until last payment is made and normally works out more expensive due to interest payments
What are the advantages and disadvantages of leasing
Adv
This equipment can be changed when it becomes obsolete or only used when required therefore not tying up finance with an outright purchase.
Disadv
Business NEVER owns equipment if used for extended period. Can work out more expensive than outright purchase.
What are the advantages and disadvantages of a bank loan
Adv
Business receives a lump sum of money up front and can spread repayments over extended period of time
Disadv
Interest charged. Paying more money back than was borrowed. Small businesses charged with higher rates of interest.
What are the advantages and disadvantages of mortgage
Adv
Same as bank but you own the property.
Disadv
If don’t keep up with repayments bank can take over ownership of property which may mean business loses use of premises.
What are the advantages and disadvantages of owners savings
Adv
Allows businesse to keep control of finances and reduces need to borrow and incur interest payments
Disadv
Once invested in business owner risks losing it if business fails
What are the advantages and disadvantages of share issue
Adv
Allows business to raise lathe sums of finance that do not need to be paid back.
Disadv
Process of releasing shares - expensive and dilutes value of existing shares.
What are the advantages and disadvantages of venture capitalist
Adv
Most likely to provide business with finance when banks deem a loan to be too risky.
Disadv
Normally change high interest rates for loan and want part ownership in return for finance
What are the advantages and disadvantages of debenture
Adv
Allows business to raise lathe sums of money with interest repayments spread over long period of time.
Disadv
If business making loss interest must be paid and debenture holders have right to sell business assets in order for loan to be repaid.
