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Business Studies > sources of finance > Flashcards

sources of finance Flashcards

1
Q

what are the 6 sources of finance

A 
debt factoring 
overdraft 
retained profit 
share capital 
loans
venture capital
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2
Q

what is debt factoring

A

the process of selling debts to a financial institution

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3
Q

when a business uses debt factoring - how much of the debt do they typically receive instantly

A

80%

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4
Q

when a business uses debt factoring the bank will retain what percentage of the debt as a fee

A

4 - 10%

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5
Q

is debt factoring an internal or external source of finance

A

external

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6
Q

is debt factoring a long or short term source of finance

A

short term source of finance

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7
Q

what are the advantages of debt factoring

A

receive a large amount of debt immediately
good source of short-term finance to reduce cash flow problems
debts are chased by experts (saves managers time)
reduces risk of bad debt

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8
Q

what are the disadvantages of debt factoring

A

Reduces profitability of the firm as a result of the fee paid to the financial institution
May damage reputation of the firm as they are seen to need short-term finance

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9
Q

what is an overdraft

A

An overdraft is the facility on a current account (bank account) up to an agreed sum which is more than what is in the account

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10
Q

what happens to a bank account when its in an overdraft

A

it goes red

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11
Q

how is the interest charged on a overdraft

A

it is only charged to the overdrawn amount

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12
Q

is an overdraft an internal or external source of finance

A

external

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13
Q

is an overdraft a long or short term source of finance

A

short term

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14
Q

what are the advantages of an overdraft

A 
Only borrowed when it is required meaning it is very flexible 
Only pay for money borrowed
Quick and easy to arrange 
No charges for paying of the overdraft
Security is usually not required
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15
Q

what are the disadvantages of an overdraft

A

The bank can ‘call it in’ (demand repayment) at any time
The business must pay interest
Interest payments can be variable making it more difficult to budget
Only relatively small amount of money
Makes the business seem as though they have cash flow problems to public

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16
Q

what is retained profit

A

profit kept in the business from revenue to help finance future activities

17
Q

is retained profit and internal or external source of finance

A

internal

18
Q

is retained profit an short or long term source of finance

A

short term

19
Q

what are the advantages of retained profit

A

avoids interest payments

does not dilute the business ownership

20
Q

what are the disadvantages of retained profit

A

Only an option is sufficient retained profit exists within the business
May cause shareholder dissatisfaction if this is at the expense of dividend payments
Reduces the security of keeping retained profits for unseen situations or to take advantage of new opportunities (an opportunity cost)
No more safety net for is something goes wrong with the business

21
Q

what is share capital

A

finance raised from the sale of shares

22
Q

what is share capital a form of

A

equity capital

23
Q

how are shareholders rewarded for their investment

A

the payment of dividends (may also benefit from increased share price)

24
Q

is share capital an external or internal source of finance

A

external

25
Q

is share capital a long or short term source of finance

A

long term source of finance

26
Q

what are the advantages of share capital

A

Only need to pay dividends if a profit is being made and the amount of the dividend is not fixed
Possible to raise large amounts of finance
No interest repayments

27
Q

what are the disadvantages of share capital

A

Partial loss of ownership as shareholders are part owners
Potential risk of loss of control for a PLC with a threat of hostile takeovers
Complex and costly process for issuing shares, especially for a PLC

28
Q

what is a loan

A

a set amount of money to provide for a specific purpose, to be repaid with interest over a set period

29
Q

what is a loan secured against

A

assets [collateral]

30
Q

what is collateral

A

an asset which is used for security for a loan

31
Q

why do interest rates vary

A

how risky the bank regards the loan to be

32
Q

what are the advantages of loans

A

Quick and easy to arrange
Fixed interest rates allow firms to budget
Improved cash flow
The borrower retains ownership of the company

33
Q

what are the disadvantages of loans

A

Interest must be paid regardless of financial performance in the business
A firm that is highly geared may be high risk – banks will be reluctant to make further loans and investors may be reluctant to buy shares
A firm normally provides security known as collateral. The asset which is the collateral and will get taken if it isn’t paid back

34
Q

what is venture capital

A

An investment from an individual or merchant bank or other organisation into another business in return for a % of the equity in the business

35
Q

is venture capital an external or internal source of finance

A

external

36
Q

is venture capital a long or short term source of finance

A

long term

37
Q

what are the advantages of venture capital

A

Potential for large sums of money for investment
Expertise to help start the business
Makes it easier to attract other sources of finance (once they see the business has a venture capitalist

38
Q

what are the disadvantages of venture capital

A

Partial loss of ownership
Risk on conflict or perceived interference by the dragon / investor
A long and complex process
Expert financial projects are likely to be required to persuade the investor to invest

Business Studies (4 decks)

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