Sources of Finance (Advantages and Disadvantages) Flashcards
What are the internal sources of finance
Retained Profit, Net Current Assets, Sale Of Assets
What are the external sources of finance
Owners Capital, Loans, Crowdfunding, Mortgages, Venture Capital, Share Capital
What is retained profit
Profit kept within the business from the year
Is retained profit a short term or long term source of finance
Short term
What are the advantages of retained profit
Avoids interest repayments.
Does not dilute business ownership.
What are the disadvantages of retained profit
Only viable of profit is within the business.
May cause the shareholders dissatisfaction if this is at the expense of dividends
What are net current assets
The sum of all assets which are not intended for use on a continuing basis in the firm’s business (12 months)
What are the advantages of net current assets
No interest payments or loss of ownership.
What are the disadvantages of net current assets
This may lower prof ability if discounts are lost from early payments
What is the equation for net current assets
Current Assets - Current Liabilities
What are current liabilities
Current liabilities are a company’s short-term financial obligations that are due within one year or within a normal operating cycle
What are trade receivables
The amount owed to the business by its customers following the sale of products
What are trade payables
The amount the business owes by their suppliers following the sale of products and raw materials
What is sale of assets
Referring to the sale of long term fixed assets
Is the sale of assets a short or long term source of finance
Short term
What are the advantages of sale of assets
No interest charges.
May be turning an obsolete asset in finance.
What are the disadvantages of sale of assets
The seller is subject to a double layer of taxation.
Transferring assets may be more complicated.
Agreements tied to certain assets may need to be renegotiated.
What is owners capital
This is the amount that the owner has invested into the business
Is owners capital a long term or short term source of finance
Usually short term however may be long term to smaller businesses
What are the advantages of owners capital
There are no interest payments needed for using owners capital.
Does not require borrowing money to fund.
The owner has full control over the finance applied.
What are the disadvantages of owners capital
The income needed for the business may also be needed for personal use
May have some physiological effects applied.
Savings will be lost if the business does not peform
What are loans
A loan is a sum of money that is borrowed from a lender, with the agreement to repay it plus interest, usually in installments, over a set period of time
What are the different types of loans
Fixed, Variable, Secured, Personal
What are the advantages of loans
Loans can help you spread the cost of a large purchase over a longer period of time, making it more affordable.
The interest and principal payments on debt can be deducted from your business income taxes.
You can spread out your loan payments over a longer period of time, making them more affordable each month.
What are the disadvantages of loans
The applied interest payments may be hefty for the business to pay back.
Some lenders require collateral to be applied.
The sign-up are usually quite time consuming
Are loans a short term or long term source of finance
Usually a long term of source of finance
What is crowdfunding
the practice of funding a project or venture by raising money from a large number of people who each contribute a relatively small amount, typically via the internet
What are the advantages of crowdfunding
A fast way to raise finance with no upfront costs.
May cause increased brand exposure.
What are the disadvantages of crowdfunding
Must have a reasonable cause in order to crowdfund.
Must build up considerable interest into the crowdfunding project.
Is crowdfunding a short term or long term source of finance
Short term source of finance
What is venture capital
Venture capital is money invested in a business, usually a start-up.
When is venture capital usually used
It is typically provided by investors who expect to receive a high return on their investment. It is also used when a business is thought to have high potential for growth
What are the advantages of venture capital
Aside from the financial backing, obtaining venture capital financing can provide a start-up or young business with a valuable source of guidance and consultation.
Venture capital allows connections to be created with esteemed businesses.
What are the disadvantages of venture capital
The business owner may lose control due to investors wanting to be heavily involved.
Is venture capital a short or long term source of finance
Long term source of finance
What are mortgages
These are long term loans normally spanning around twenty five years which is secured against a certain asset. Interest is applied on the mortgage
What are the advantages of mortgages
Large amounts of finance can be raised.
Paid over a prolonged period of time.
Ownership or control of the business is not lost.
What are the disadvantages of mortgages
Interest is applied on the amount borrowed.
Interest rates can fluctuate.
Interest has to be made no matter if profit is made or not
Is mortgages a long term or short term source of finance
Long term source of finance
What is debt factoring
This is essentially selling the businesses debts to a third party in order to receive cash at a fast rate.
The factoring company pays a percentage and receives a right to collect the debts
What are the advantages of debt factoring
Speeds up the cash flow of the business.
The factor company takes the risk of bad debt.
What are the disadvantages of debt factoring
Only a certain of percentage of the amount owed to the initial company is given which reduces profits.
May give customers the wrong impression and may alienate them.
When would debt factoring usually be used
Used when the business does not have the facilities or the time to chase up the debts.
Business may need income at a fast rate.
Is debt factoring a short term or long term source of finance
Short term source of finance
