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Higher Business > Sources of finance > Flashcards

Sources of finance Flashcards

1
Q

dividend…

A

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

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2
Q

why might a business need finance?

A

to purchase premises, warehouse or machinery, inventory, wages, expansion

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3
Q

what will the source of finance depend on?

A
  • what the finance is being used for
  • how long the finance is required
  • how much finance is needed
  • costs - interest rate
  • payback terms
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4
Q

retained profit…

A

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

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5
Q

what are the advantages of retained profit?

A
  • can then help with the business expansion
  • there is no interest to pay back
  • can be spent in way way the owners see fit
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6
Q

what are the disadvantages of retained profit?

A
  • 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
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7
Q

sales of assets…

A

when a business sells off its unused assets - usually machinery

this money is then reinvested into the business

internal source of finance

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8
Q

what are the advantages to selling assets?

A
  • 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
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9
Q

what are the disadvantages of selling assets?

A

expensive to repurchase any machinery if it was required again

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10
Q

bank loan…

A

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

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11
Q

what are the advantages of a bank loan?

A
  • 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
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12
Q

what are the disadvantages of a bank loan?

A
  • interest is charged with each monthly repayment which is a cost to the business
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13
Q

mortgage…

A

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

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14
Q

what are the advantages of a mortgage?

A
  • large amounts of finance can be arranged quickly

- given over a long period of time

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15
Q

what are the disadvantages of a mortgage?

A
  • interest is charged

- property can be lost to the lenders payment are missed

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16
Q

grants…

A
  • 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
17
Q

what are the advantages of grants?

A
  • no repayment is need to be made -good images is generated as usually the business is helping out the local area
18
Q

what are disadvantages of grants?

A
  • Criteria needs to be met

- applications are time-consuming

19
Q

hire purchase and leasing compared

A
  • 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
20
Q

share issue…

A
  • 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
21
Q

what are the advantages of share issue?

A
  • large amount of capital can be raised without interest

- shareholders have limited liability

22
Q

The disadvantages to share issue?

A
  • loss of control shareholders become part owners
23
Q

debt factoring…

A
  • 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
24
Q

what are the advantages of debt factoring?

A
  • improve cash flow

- protection against bad debts

25
Q

what are the disadvantages of debt factoring ?

A
  • interest is charged at high rate

- factor is responsible for collections, if they are unprofessional this may harm relationship

26
Q

debentures…

A
  • 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
27
Q

what are the advantages of a debenture?

A
  • financial protection

- fixed interest rate

28
Q

what are the disadvantages of a debenture?

A
  • no flexibility in payment - can lead to bankruptcy

- debentures holder have no share in the company itself

29
Q

venture capital…

A
  • 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
30
Q

what are the advantages of venture capital?

A

-good because it enables businesses with a poor credit rating to obtain finance

31
Q

what are the disadvantages of venture capital?

A

-a large share of the business may have to be given away in return

32
Q

crowd funding…

A
  • 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
33
Q

what are the advantages of crowd funding?

A
  • access to a large amount of investors

- fast spruce of finance

34
Q

what are the disadvantages of crowd funding?

A

-if you ask publicly for investors risk your project being copied by others

35
Q

short term finance…

A
  • overdraft
  • trade credit
  • grant
  • retained profit
36
Q

medium term finance…

A
  • bank loan
  • leasing
  • hire purchase
37
Q

long term finance…

A
  • share issue
  • mortgage
  • owners personal finance

Higher Business (44 decks)

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