Theme two sources of finance Flashcards
What are personal savings?
When an entrepreneur uses personal finances such as cash in bank accounts, or less liquid assets such as stocks and shares to finance the business.
Internal source of finance.
What are the pros of using personal savings?
No financial cost.
Maintain control.
Easiest and quickest type of finance.
What are the cons of using personal finance?
Likely to be limited.
If business does not initially make profit using savings - financial pressure.
What are the pros of using retained profits?
No financial cost - no interest.
No control/share given up.
Safe low risk approach - good in recession.
What are the cons of using retained profits?
May create conflict with shareholders as they may receive less dividends.
Usually finite retained profit - slow growth.
What does selling fixed assets mean?
Raising cash via the sale of surplus fixed assets e.g. spare machined to spare vehicles.
What are the pros of selling fixed assets?
Not a form of debt - no interest.
Maintain control.
Providing you can find a buyer its a quick form of cash.
What are the cons of selling fixed assets?
Only a finite amount of times you do it as likely you have few surplus assets.
May not find a buyer.
May not receive a fair price for it.
Likely the price had depreciated.
What are the pros of using a bank loan?
No share in the business needs to be given up.
Lower interest rate than overdraft.
Fits to business needs.
May improve credit score.
What are the cons of using a bank loan?
Assets will be taken if you fail to repay - unless you have limited liability.
No flexibility - must keep to the repayment terms.
May worsen credit score.
Increases gearing of business.
What is the formula for calculating interest?
Total repayment - borrowed amount.
Divided by borrowed amount.
Multiplies by 100.
What is crowdfunding?
Raising finance from a large amount of people who each contribute a relatively small amount for a share of the venture/project.
What are the pros of crowdfunding?
No repayments need to be made.
Excellent exposure - large amount of investors, common to get social media attention.
Good feedback - large amount of investors could help to improve the business as they are now aligned with it.
What are the cons of crowdfunding?
If profits are made, they will be shared.
If venture/project fails, reputation of the owner/business may be damaged.
Investors may have very limited expertise.
What are new share issues?
When a limited company issues shares in exchange for a payment.
