Sources Of Finance Flashcards
What are two types of finance?
Sources of finance can be INTERNAL or EXTERNAL.
What are internal finances?
Are from the business
What is owners funds?
This is money that is put into the business from the private savings of the owners. Many businesses are started using the owners’ own savings, an inheritance or redundancy pay.
What is retained profits?
When businesses make profits, the owners can decide to use some or all of them to expand and improve the business.
What is selling assets?
Some businesses will have possessions that they no longer need. These can be sold off to raise money. Such assets may include machinery, land, vehicles or part of business.
What is short term external finance?
These are from outside the business and have to be repaid within one year.
What is bank overdraft?
The business is allowed to have a negative bank account when it does not have enough money to pay its costs. There is usually a limit on the amount of the overdraft.
Advantages of bank overdraft?
Flexible – the business borrows what it needs
Unlike loans, interest is only paid on the amount borrowed.
Disadvantages of bank overdraft?
Interest charged is an additional fixed cost.
The bank can end the agreement at any time.
What is trade credit?
This means not immediately paying suppliers for stock.
Advantages of trade credit?
No interest is paid
Helps cash flow if no overdraft is available
Disadvantages of trade credit?
May miss out on discounts
May not be available to new businesses.
What does leasing mean?
means that you rent the asset and never own it.
Advantages of leasing?
Cheaper in the short run than buying it
Asset can be regularly updated
Disadvantages of leasing?
More expensive in the long run than buying
What is long term external sources?
These are from outside the business and will take more than a year to repay.
In some cases (share capital or Government grants), they will not have to be repaid at all.
What is a bank loan?
The business will borrow a lump sum of money that must be repaid, with interest, over a number of years; usually in monthly instalments.
Advantages of bank loans?
No loss of ownership (unlike shares)
Repayments are only for a fixed period of time (unlike dividends to shareholders)
Monthly repayments are better for cash flow than paying a lump sum for a fixed asset
Disadvantages of bank loans?
Interest is an additional fixed cost
Monthly repayments are still an additional outflow that can damage cash flow
Security may be needed
What is hire purchase?
The business buys an asset (e.g. a car) and pay for it in monthly instalments.
It does not own the asset until it makes the last payment.
Advantages of hire purchase?
Can be used if a bank loan isn’t available
No loss of ownership (unlike shares)
No security is needed (unlike bank loans)
Disadvantages of hire purchase
Often a higher rate of interest than banks
Monthly repayments are an additional outflow
Asset may be taken if repayments aren’t met
What is share issues?
Money paid by shareholders to become owners of a limited company.
