Topic 1.3.4 Sources of business finance Flashcards
What is crowdfunding?
When a business sets a target amount of finance to raise.
The business idea is posted on a crowdfunding website
A wide range of investors pledge to invest a certain amount of money in the business in return of a share in the business.
Once business reaches the target,then it receives all the pledged funds.
Advantages of crowdfunding?
-Good way of testing the viability of the business
-if people are keen to invest it would suggest that the business has potential
-Able to raise a significant amount of finance which the business is unlikely to be able to obtain via a bank loan
-Some of the investors may be experienced entrepreneurs who can offer valuable advice.
What are the short term sources of finance?
Overdraft,trade credit
What are the long term sources of finance?
Crowdfunding,venture capital,share capital,loans,government grants,owner’s personal savings,retained profit
Advantages of loans
Generating large sums of finacne. Business can uses to pay employees,and wages.
Disadvantages of loans?
Pay interest back to the bank.This means that a business will incur larger cash outflows .As a result this could lead to a negative cash flow and the business being insolvent leading to business failure.
Advantages of trade credit?
Business have longer repayment times.This means that a business has time to reduce other costs of the business in order to afford for the payment of raw materials for suppliers.As a result this helps lead to a better cash flow of the business,reducing the risk of the business being insolvent and leading to business failure.
Disadvantgaes of trade credit
Bad relationships with the supplier and the business.This is because a supplier will find you less reliable and trustworthy if the business is always not paying the suppliers on time.As a result,could lead to delay in deliveries since the suppliers may not want to offer raw material to the business.
Advantages of venture capital?
Helps a business expand quickly.This means that they can generate high amount of revenue from customers because they have experts who an help them grow.As a result allows a business to increase its profit and lead to business sucess.
Disadvantages of venture capital?
One disadvantage of venture capital for sources of finance is that the profits of the business is shared.This means that an entrepreneur may feel less satisfied.As a result,could decrease motivation of the entrepreneur and decreased productivity
Loss of control
Advantages of government grants?
One advantage of government grants is that a business does not need to pay money back to the government.This means that a business costs stay the same and aren’t affected.As a result,a business break even stays the same and they can increase production of the business.
Disadvantages of government grants?
One disadvantage is that business need to meet a certain criteria.This means that a business has less freedom to do what they want and more responsibility.As a result,costs could increase.
Advantage of retained profit?
One advantage is that you don’t have to pay interest back.This is because it is profit that the business earns themselves that they use to put back into the business.As a result,business could use this to improve products which caters more to customer needs and leads to attraction of customers.
Cheap source of finance.This is because interest is not paid on retained profit.Therefore,the business would not experience an increase .
Disadvantage of retained profit
Money could be easily gone.This means that a business can’t use this to solve any future unseen problems.
