Sources Of Finance Flashcards
Shorter sources of finance :
Up to three years financial assistance. Needed due to insufficient cash flow.
Medium term finance :
Between 3 and 10 year financial assistance. Needed ; to replace assets, for expansion, to convert overdraft into a loan
Long term financial assistance :
For 10 years or more. Needed to secure the long term growth of the firm
Internal sources : definition
If finance is raised internally, it doesn’t raise the debts of the firm. Eg sale of assets, retained profit, trade credit, and owners own money in the case of a sole trader.
External sources : definition
Finance is provided by people of institutions outside the business in the form of loans, overdrafts, shares and debentures. The use of external sources creates a debt that will require payment
Equity share capital : summmary
Exists for an unlimited term
Carries a voting right
Dividends payable dependent upon company performance
Dividends paid after tax and therefore don’t affect tax liability
Not secured
Debts : summary
Exists for a fixed term eg a 10 year loan
Doesn’t carry voting right
Interest payable regardless of company performance
Interest paid before tax and therefore reduces tax liability
Lenders towards the top of the list when payments are being made following closure of company
Will be secured against an asset
Short term : egs
Overdraft, loan, trade credit, factoring, hire
purchase.
Overdraft : advantages
Quick to arrange
Only pay interest on amount overdrawn
Good short term solution to a cash flow problem
Overdraft : disadvantages
Suitable for smaller amounts
Repaid in short time
Interest
Trade credit : advantages
More cash to use for immediate future
No interest charge
Trade credit : disadvantages
Only used to buy certain goods
Bills usually have to be settled in 30, 60 or 90 days
Factoring : advantages
Receivables turned into cash quickly
Business can focus on selling rather than collecting debt
Factoring : disadvantages
High cost
Customer may feel relationship with business changed
Hire purchase : advantages
Large sum not needed instantly
Payment spread over time
Improve cash flow
Hire purchase : disadvantages
High interest
I term doesn’t belong to business until end of term
Mediums term finance : egs
Loan, hire purchase, leasing, retained profit
Leasing : advantages
Large sum not needed immediately
Spread over time
Improve cash flow
Lease company responsible for maintenance of items
Leasing : disadvantages
High interest
Business doesn’t own them
Retained profit: advantages
No interest
Retained : disadvantages
Could’ve been invested elsewhere
Maybe not sufficient funds
Lower dividends
Long term finance : egs
Loan, sale of assets, sale and leaseback, retained profit, shares, debentures
Shares : advantages
No repayment necessary
Cheaper than loan
Possible to raise large amounts
Shares : disadvantages
Shares need dividends
Original owners may lose control of business
Risky shareholders
Sale and leaseback : advantages
Large sum of money created
Business can operate as normal
Lease company responsible for maintenance
Sale and leaseback : disadvantages
High interest
Item not owned by business
No guarantee of lease renewal
Cash flow : definition
Needed for sufficient inflows of cash to finance it’s day to day outgoings
Inflows : definition
Sales revenue, capital, loans and grants
Outflows : definition
Purchases, rents and rates, wages and salaries.
Variable vs fixed rate : advantages
FR : aware of amount of repayments
Vs
VR : if rate falls business pays new lower rate
Variable vs fixed rate : disadvantages
FR : if rate, still have to pay higher rate
Vs
VR : unaware of what repayment cost will be ie difficult financial planning
