Sources of finance Flashcards
dividend…
A share of the probity paid to shareholders.
paid in relation to how many shares the hold - more shares = large dividend.
usually a yearly payment
why might a business need finance?
to purchase premises, warehouse or machinery, inventory, wages, expansion
what will the source of finance depend on?
- what the finance is being used for
- how long the finance is required
- how much finance is needed
- costs - interest rate
- payback terms
retained profit…
these are profits which are not distributed to shareholders or taken as drawings by the owners. these profits are reinvested back into the business.
Internal source of finance
what are the advantages of retained profit?
- can then help with the business expansion
- there is no interest to pay back
- can be spent in way way the owners see fit
what are the disadvantages of retained profit?
- shareholders may be unhappy that they are not receiving higher in return
- if all profits are spent the business may not be able to pay for unexpected costs
sales of assets…
when a business sells off its unused assets - usually machinery
this money is then reinvested into the business
internal source of finance
what are the advantages to selling assets?
- can then help the business with expansion
- there is no interest to pay back
- can be spent in any way the owners see fit
- frees up cash that was tied down
what are the disadvantages of selling assets?
expensive to repurchase any machinery if it was required again
bank loan…
when a large sum of money is borrowed by a business from a bank for an agreed period of time this money is then paid back by the business over a number of years an equal monthly instalments with interest
a bank loan as an external source of finance
what are the advantages of a bank loan?
- loans are fairly quick and easy to arrange if the business is trusted by the bank
- the business can spend the loan however it wished but it is usually used for expansion
what are the disadvantages of a bank loan?
- interest is charged with each monthly repayment which is a cost to the business
mortgage…
A mortgage of a long-term source of finance
it is a sum of money borrowed from the bank is purely for the purchase of land of property this is paid back in instalments however usually over a long period of time
it is an external source of finance
what are the advantages of a mortgage?
- large amounts of finance can be arranged quickly
- given over a long period of time
what are the disadvantages of a mortgage?
- interest is charged
- property can be lost to the lenders payment are missed
grants…
- fixed amount of money usually awarded by the government or charitable organisations, these are usually only rewarded at the business meet certain criteria such as providing jobs in an area of high unemployment
- usually don’t need to be paid back
- is an external source of finance
what are the advantages of grants?
- no repayment is need to be made -good images is generated as usually the business is helping out the local area
what are disadvantages of grants?
- Criteria needs to be met
- applications are time-consuming
hire purchase and leasing compared
- they both involve paying a deposit on an item and paying in monthly instalments. they both allow a business to use a equipment while not having to pay the full cost of equipment at once.
- however at the end of the agreement leased equipment is not owned by the firm and it’s only been rented. Hire purchase equipment is owned by the firm after the final payment.
- an external source of finance
share issue…
- available to limited companies (business in the public sector is unable to use issue share) where they invite shareholders to invest in the business issuing extra shares
- external source of finance
what are the advantages of share issue?
- large amount of capital can be raised without interest
- shareholders have limited liability
The disadvantages to share issue?
- loss of control shareholders become part owners
debt factoring…
- business sells its accounts Receivable (invoices) to the third-party at a discount. the factor then deals with all outstanding payments and the bushes receives cash instantly.
- external source of finance
what are the advantages of debt factoring?
- improve cash flow
- protection against bad debts
what are the disadvantages of debt factoring ?
- interest is charged at high rate
- factor is responsible for collections, if they are unprofessional this may harm relationship
debentures…
- long-term source of finance
- a debtenure is a document issued by a lending company when providing another company with high value funding giving them security in case the borrowing company don’t repay
- the debenture typically carries a fixed rate of interest
what are the advantages of a debenture?
- financial protection
- fixed interest rate
what are the disadvantages of a debenture?
- no flexibility in payment - can lead to bankruptcy
- debentures holder have no share in the company itself
venture capital…
- These people provide loans to businesses that bank think is too risky - it can be due to being a new business they will take a percentage share of the business in return
what are the advantages of venture capital?
-good because it enables businesses with a poor credit rating to obtain finance
what are the disadvantages of venture capital?
-a large share of the business may have to be given away in return
crowd funding…
- Involves getting a small amount of finance from a large amount of people. this is usually through social media and crowd funding websites
- crowd funding investors may:
get rewards for their investment
receive a share of the profits
donate money
what are the advantages of crowd funding?
- access to a large amount of investors
- fast spruce of finance
what are the disadvantages of crowd funding?
-if you ask publicly for investors risk your project being copied by others
short term finance…
- overdraft
- trade credit
- grant
- retained profit
medium term finance…
- bank loan
- leasing
- hire purchase
long term finance…
- share issue
- mortgage
- owners personal finance
