Sources of Finance (Private Sector) Flashcards
What is Owner’s Equity (Sole Trader and Partnership only)?
This refers to money invested by the owner/partner into the business.
What are the advantages of Owner’s Equity?
The money does not have to be repaid.
No interest has to be paid.
What is a disadvantage of Owner’s Equity?
There may be insufficient money to fund the business.
What is a Bank Loan?
This refers to a sum on money lent from the bank which has to be repaid with interest over an agreed number of years.
What are the advantages of a Bank Loan?
The money can be obtained in one lump sum.
Repayments can be spread over several years so budgeting is easier.
What are the disadvantages of a Bank Loan?
Interest has to be paid.
Small businesses may find it hard to obtain a bank loan and may have to pay higher rates of interest.
What is a Grant?
This refers to a sum of money received from the Local Council, Government or Lottery for a specific purpose.
What are the advantages of a Grant?
The money doe not have to be repaid.
A large amount of money can be received at one time.
What are the disadvantages of a Grant?
There will be certain restrictions as to what the money can be used for.
Time consuming and complex application process.
What are Re-Invested Profits?
This refers to profit left over at the ned of the year that has not been shared with owner(s).
What is a advantage of Re-Invested Profits?
There are no extra costs (eg interest to be paid).
What is a disadvantages of Re-Invested Profits?
There may be insufficient money to fund the business.
What is a Mortgage?
This is a loan specifically for the purchase of property.
What is a advantage of a Mortgage?
Amount can be repaid over a long period of time (eg 25 years).
What are the disadvantages of a Mortgage?
Interest has to be paid.
If repayments are not made then the property may be repossessed.
What is Leasing?
This is paying a monthly fee for the use of equipment/vehicles (assets).
What are the advantages of Leasing?
Can obtain the asset without a large financial outlay.
Repairs are carried out by the leasing company as part of the agreement.
What is Hire Purchase?
Buying an assets and paying it back over several months (eg 48 or 60 months). An initial down payment is normally required.
What are the advantages of Hire Purchase?
Allows businesses to buy assets without needing the full amount up front.
Once full payments have been made the asset is owned.
What are the disadvantages of Hire Purchase?
The asset is not fully owned until the last payment is made.
The total paid is more than the value of the asset dur to interest charges.
What is Bank Overdraft?
Withdrawing more money from your bank account than you have available.
What are the advantages of a Bank Overdraft?
Useful as a short-term source of finance to overcome cash flow problems.
You are not tied into an agreement which required repayment over several years.
What are the disadvantages of a Bank Overdraft?
An expensive form of borrowing with high interest charges.
Additional costs incurred if not pre-arranged with the bank.
What is a Trade Credit?
When goods/materials can be bought from suppliers but are not paid for until a later date (eg 30 days credit).
What are the advantages of a Trade Credit?
Can buy goods and sell them on before payment is required.
Provided payments is made within the agreed number of months then no interest is charged.
What are the disadvantages of a Trade Credit?
May lose out on prompt payment discounts.
May gain a reputation as a slow payer.
What are Issuing Shares?
Selling shares to friend and family in return for part ownership of the company.
What is an advantages of Issuing Shares?
Large amounts of additional finance can be raised.
What are the disadvantages of Issuing Shares?
Dividend have to be paid which reduces the retained profit for the company.
New shareholders will have a say in how the business is run (ownership is diluted).
