Sources of Finance Flashcards
What are internal sources of finance?
Internal sources of finance describes money that is raised within a business.. The business doesn’t need anyone else to raise this money.
(Internal) What is retained profit?
- This is profit that the business has effectively saved whilst it has been operating (running).
- Retained profit is a cheap source of finance because a business does not have to pay any interest.
- Retained profit is limited. A business can only spend profits that have been saved.
- Retained profit may not be high enough to fund big, long-term projects.
(Internal) What does selling assets involve?
- A business can sell its assets to raise cash. For example, a company can sell buildings or machinery that they do not use.
- They are usually a cheap source of finance because the business does not have to pay interest.
- However, selling assets can harm a business’ operations.
(Internal) What are the PROs and CONs of using personal savings as a source of finance?
- This is personal money that is invested by the owner of a company.
- It is most relevant for start-up businesses, in which the entrepreneur has saved up to fund their business venture.
- A downside is that it can be very risky for an entrepreneur to put a significant amount of their personal savings into a business. They may not be able to afford this.
What are external sources of finance?
External sources of finance raise finance (money) from a third party. The finance can be used to fund large, long-term investments. However, external finance is often more expensive because businesses pay interest on loans. T
What are the different types of external sources of finances?
LOANS FROM FAMILY AND FRIENDS
- Start-ups often use loans from family and friends. This is usually because the entrepreneur doesn’t have enough personal savings to finance the investment.
- If the entrepreneur gives up equity (a share of the business) then this is not a loan.
GOVERNMENT GRANTS
- A government may give grants (money) to companies to research things that the government is interested in.
- The Horizon 2020 fund is a set of grants given out by the countries in the European Union.
TRADE CREDIT
- Trade credit describes when firms pay suppliers at a later date. It involves buying something now and paying for it later.
SHARE CAPITAL
- A firm can sell share capital (some of its shares) to other people or companies. They give away a percentage of the company in return for getting finance invested in the business.
- This is usually what happens on Dragon’s Den on the BBC. Public limited companies may do new share issues, creating shares and issuing them to investors through a stock market.
- Private limited companies can sell share capital (shares) to family, friends or even a private equity company.
BANK LOANS AND MORTGAGES
- Bank loans and mortgages are very important for many businesses. A business borrows money from a bank and then pays interest on the money borrowed.
- It is often harder for new businesses to get bank loans because banks see them as riskier.
HIRE PURCHASES
- This is when a business buys something and instead of paying for it upfront pays for it in instalments.
- When PSG bought Kylian Mbappe from Monaco, they didn’t pay the whole amount at the time and instead completed the purchase in different stages.
- This lets firms buy things (like machinery) for the business that they otherwise wouldn’t be able to afford.
What factors affect what is the best source of financing for a business?
- Cost
- Long-term vs short-term
- New vs established business
- Financial situation
What is cash?
Cash is the money that a business can spend immediately (it doesn’t include money that a business owes or is owed).
What is cash flow?
Cash flow is the amount of money that is coming in and out if a business and the timings of these cash transfers.
What is net cash flow?
Net cash flows = cash inflows - cash outflows
What is opening balance ?
The amount of cash that the business starts to trade with.
What is closing balance?
The amount of cash that business finishes trading with.
What is a cash flow forecast?
Cash flow forecasts are a business’ prediction of how much money will come in and out of the business in a given amount of time.
What consequences do cash flows problems have on employees?
- If a firm runs out of cash, it may be unable to pay its employees.
- If employees are worried about cash, this can have a negative impact on employee motivation and they may leave the firm.
What consequences do cash flows problems have on suppliers?
- If a business runs out of cash, it may not be able to pay its suppliers.
- This could create a temporary halt (stop) in production. It may also damage the relationship between the business and suppliers.
