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Business > SOURCES OF FINANCE > Flashcards

SOURCES OF FINANCE Flashcards

1
Q

Why does a business need finance?

A
  • Market research
  • Technology
  • Wages
  • Raw materials
  • Equipment
  • Expansion
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2
Q

Start-up capital meaning

A

capital needed by entrepreneur when starting a business

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3
Q

Working capital meaning

A

capital needed for day to day running expenses and to pay short term debts

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4
Q

Capital expenditure meaning

A

spendings on non-current assets

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5
Q

4 main internal sources of finance

A
  • Owners savings
  • Retained profits
  • Sale of assets
  • Improve management of working capital
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6
Q

Owners savings pros and cons

A

Advantages

  • Available quickly
  • No interest

Disadvantages

  • Savings may be too low
  • Risk of losing saving
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7
Q

Retained profit pros and cons

A

Retained Profit: profit after all tax, interest, dividends, cost of sales, etc..

Advantages

  • No interest
  • No need to be repaid

Disadvantages

  • Small firms may not have enough retained profit
  • Reduces payment to shareholders
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8
Q

Sale of assets pros and cons

A

Advantages:

  • Better use of capital
  • No costs
  • No need to be repaid, no interest

Disadvantages:

  • Can not be used again
  • Not all firms have valuable assets
  • Takes time
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9
Q

Improve management of working capital

A
  • Trade credit : payment allowed to be done earlier
  • receivables: money due to be paid later by customers
  • Can negotiate trade credit with supplier and request immediate payment from customer

Advantages:
- No interest

Disadvantages:
- Small firms may lack recieveables

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10
Q

Short term external sources of finance

A
  • Overdraft
  • Trade credit
  • Debt factoring
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11
Q

Overdraft, define, pros and cons

A

Overdraft: Firm is allowed to have a negative bank account balance for a short period of time

Advantages:

  • Flexible and easy to arrange
  • Easy to deal with short term cash flow problems
  • Cheaper than loan in short term

Disadvantages:

  • High interest rate if not paid back over long period
  • Bank may ask for repayment in short notice
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12
Q

Trade credit, define, pros and cons

A

When suppliers agree to get payment in the future

Advantages:
- No interest and no need to borrow

Disadvantages:
- Can lose relationship with supplier if failure to make payment on time

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13
Q

Debt factoring, define, pros and cons

A

Debt factoring: agencies with buy sales invoices at a discounted price from firms for immediate cash

Advantages:
- Immediate cash (receivables turned into cash)

Disadvantage:
- Full amount of receivable is not received

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14
Q

Medium to long term sources of finance

A
  • Bank loan
  • Sales of shares
  • Leasing
  • Hire purchase
  • Grants
  • Micro-finance
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15
Q

Bank loan, define, pros and cons

A

Bank loan: sum of cash obtained by bank that is repaid over a fixed period of time with interest

Advantages:

  • Easy to arrange
  • Collateral can be used to secure loans
  • Low interest rate when borrowing large amount
  • Makes long term planning easier as know how much needs to be repaid per month

Disadvantages:

  • High interest rate especially for small firms
  • Needs to be repaid
  • Security/collateral is often needed
  • Mortgage = loan for property
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16
Q

Sales of shares, define, pros and cons

A
  • limited companies can spread the ownership by selling shares

Advantages:

  • No need to be repaid
  • No interest
  • Can be huge source of finance

Disadvantages:

  • Not available to everyone
  • Dilutes ownership, so less control
17
Q

Leasing, define, pros and cons

A

Leasing: Allows firm to use an asset without buying it by making monthly payments

Advantages:

  • Can use expensive things without buying; cheaper
  • No need to pay maintenance and repair costs

Disadvantages:
- Can be more expensive than purchasing the asset in long term

18
Q

Hire purchase, define, pros and cons

A

Hire purchase: Firm buys an asset over a long period of time with monthly payments

Advantages:
- No need to pay large cash sum

Disadvantages:

  • Responsible for repair and maintaince
  • Interest can be high
19
Q

Grants, deine, pros and cons

A
  • Funds given by organisations to a business

Advantages:
- No need to repay

  • Disadvantages:
  • Unusual and hard to recieve
20
Q

Micro-finance, define

A

Banks may not lend to poor because:

  • loan amount may be too low - so less profit for bank
  • no security/collateral

So institutions are setup in low income areas which lend small sums of money for poor entrepreneurs so they can start-up their business

Business (22 decks)

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