Theme 1.3 - Sources Of Finance Flashcards
Why is it important for businesses to have a sufficient amount of capital?
To cover start-up costs
What are internal sources of finance?
Finances raised internally that do not increase the debts of the business
List three examples of internal sources of finance
Personal savings
Retained profit
Sales of unwanted assets
What are external sources of finance?
Finance provided by people or institutions outside the business, creating a debt that will require payment
List two examples of external sources of finance
Loans (medium to long term)
Overdraft (short term)
True or False: Internal sources of finance increase the debts of the business
False
What is working capital used for?
Day-to-day costs
What is the purpose of retained profit as an internal source of finance?
To reinvest into the business without incurring debt
What is trade credit?
A credit arrangement that is only offered to businesses by suppliers, where the business can take the supplies for free, but must pay the supplier back once they get paid
Eg. Builders
What is a credit limit?
The maximum amount of credit a business has with a financial institution or supplier
If they want more supplies, they must pay off the money owed
What is a credit period?
The maximum amount of time that a business can take to pay off what is owed during the trade credit
What is retrospective discount?
A discount applied when a business has purchased a certain number of goods from one supplier as an incentive for their repeat business
What is an overdraft?
A facility offered by a bank that allows an account holder to borrow more money than they actually have at short notice
What are the advantages of overdrafts
Quick and easy to arrange
Only pay interest on amount withdrawn
Good short-term solution to a cash flow problem
What are the disadvantages of overdrafts?
Only suitable for smaller amounts of money
Has to be repaid in a short period of time
Interest or charges are paid
What are the advantages of trade credit?
Gives the business more cash to use in immediate future
Does not incur interest
What are the disadvantages of trade credit?
Only be used to buy certain goods
Bills have to be settled within 30,60,90 days
What are the differences between private and public limited companies?
Private companies have restricted ownership, so shares can only be sold if all shareholders agree
Public companies have shares that can be bought by anyone
Private companies can start selling shares with as little as £2 capital
Public companies need £50,000 worth of shares to be put on the stock exchange
What is retained profit?
Profit that a business keeps rather than paying out to shareholders
What is share capital?
Money to invest into a business that is sourced from investors
What is venture capital?
Money to invest into the business raised by the business, issuing shares that are sold to investors
