Sources of finance - Small firms Flashcards
What does liquidity mean?
How easily the business can access cash.
What is Trade Credit?
(Short - term)
Businesses give firms one or two months to pay for certain purchases.
Why can this be useful for a small firm?
They have time to earn the money needed to pay the debt.
If the firm makes the payment too late…
(Trade Credit)
they could end up with a large fee.
What is an Overdraft?
(Short - term)
Lets the firm take more money out of its bank account than it has paid into it.
How can overdraft be good for a business?
Allows business to make payments on time even if they don’t have enough cash.
What is a disadvantage of Overdraft?
Usually have a higher interest rate than other loans and the bank can cancel the overdraft at any time.
If it isn’t paid off…
(Overdraft)
the bank can take some of the business’ assets.
What are Assets?
Valuable items owned by the business or money owed to the business.
What are the 3 types of loans?
Bank loans
Friends and family
Mortgages
What is good about a bank loan?
(Long-term)
Quick and easy to take out.
What is a negative about a bank loan?
Repaid with interest, and if they aren’t repaid, bank can reposess firm’s assets.
However, interest rates for loans is usually lower than for Overdrafts.
What is an advantage of being lent money from friends and family?
(Long-term)
Will go into business immediately, even easier than bank.
What is a drawback of being lent money from friends and family?
The indivdual may expect a share in the profits of the business.
What are Mortages?
(Long-term)
Loans used to finance buying property. Property is used as Collateral.
What does Collateral mean?
The property can be taken by the bank if the individual can’t pay off the mortgage.
What is an Advantage of Mortgages?
Interest payments are relatively low compared to other sources of finance.
What is Hire purchase?
(Long-term)
When a firm purchases something by first paying a deposit, then paying the rest instalments over a period of time while they have use of the product.
What does Hire purchase allow?
Allows firms to purchase useful things for their business that they otherwise couldn’t afford, such as expensive machinery.
In Hire purchase they have use of the product…
over a longer period of time.
What are Government Grants?
Money given to a firm by the Government which doesn’t need to be paid back. Assistance.
What is a disadvantage of Government Grants?
There are fewer options than for loans, strict criteria may have to be met to qualify for them, and the money may have to be spent in a specific way.
