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Business Studie - Unit 2 > Sources Of Finance > Flashcards

Sources Of Finance Flashcards

1
Q

Shorter sources of finance :

A

Up to three years financial assistance. Needed due to insufficient cash flow.

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2
Q

Medium term finance :

A

Between 3 and 10 year financial assistance. Needed ; to replace assets, for expansion, to convert overdraft into a loan

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3
Q

Long term financial assistance :

A

For 10 years or more. Needed to secure the long term growth of the firm

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4
Q

Internal sources : definition

A

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.

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5
Q

External sources : definition

A

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

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6
Q

Equity share capital : summmary

A

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

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7
Q

Debts : summary

A

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

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8
Q

Short term : egs

A

Overdraft, loan, trade credit, factoring, hire

purchase.

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9
Q

Overdraft : advantages

A

Quick to arrange
Only pay interest on amount overdrawn
Good short term solution to a cash flow problem

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10
Q

Overdraft : disadvantages

A

Suitable for smaller amounts
Repaid in short time
Interest

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11
Q

Trade credit : advantages

A

More cash to use for immediate future

No interest charge

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12
Q

Trade credit : disadvantages

A

Only used to buy certain goods

Bills usually have to be settled in 30, 60 or 90 days

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13
Q

Factoring : advantages

A

Receivables turned into cash quickly

Business can focus on selling rather than collecting debt

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14
Q

Factoring : disadvantages

A

High cost

Customer may feel relationship with business changed

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15
Q

Hire purchase : advantages

A

Large sum not needed instantly
Payment spread over time
Improve cash flow

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16
Q

Hire purchase : disadvantages

A

High interest

I term doesn’t belong to business until end of term

17
Q

Mediums term finance : egs

A

Loan, hire purchase, leasing, retained profit

18
Q

Leasing : advantages

A

Large sum not needed immediately
Spread over time
Improve cash flow
Lease company responsible for maintenance of items

19
Q

Leasing : disadvantages

A

High interest

Business doesn’t own them

20
Q

Retained profit: advantages

A

No interest

21
Q

Retained : disadvantages

A

Could’ve been invested elsewhere
Maybe not sufficient funds
Lower dividends

22
Q

Long term finance : egs

A

Loan, sale of assets, sale and leaseback, retained profit, shares, debentures

23
Q

Shares : advantages

A

No repayment necessary
Cheaper than loan
Possible to raise large amounts

24
Q

Shares : disadvantages

A

Shares need dividends
Original owners may lose control of business
Risky shareholders

25
Q

Sale and leaseback : advantages

A

Large sum of money created
Business can operate as normal
Lease company responsible for maintenance

26
Q

Sale and leaseback : disadvantages

A

High interest
Item not owned by business
No guarantee of lease renewal

27
Q

Cash flow : definition

A

Needed for sufficient inflows of cash to finance it’s day to day outgoings

28
Q

Inflows : definition

A

Sales revenue, capital, loans and grants

29
Q

Outflows : definition

A

Purchases, rents and rates, wages and salaries.

30
Q

Variable vs fixed rate : advantages

A

FR : aware of amount of repayments
Vs
VR : if rate falls business pays new lower rate

31
Q

Variable vs fixed rate : disadvantages

A

FR : if rate, still have to pay higher rate
Vs
VR : unaware of what repayment cost will be ie difficult financial planning

Business Studie - Unit 2 (4 decks)

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