Topic 26 - Sources of Finance Flashcards
Factors Affecting Sources of Finance
- Short-term finance required
- Long-term finance required
- Interest rates
- Payback term
- Size and type of organisation
Retained Profits
Holding back profits from previous years.
Advantages:
- Can be used to make larger purchases
- Doesn’t go into debt
Disadvantages:
- More difficult to grow
Sale of Assets
Selling something that the business no longer needs.
Advantages:
- Money can be raised quickly
- Doesn’t need to be repaid
Disadvantages:
- May have to sell asset for less than it is worth
Share Issue
Selling shares in the business.
Advantages:
- Large sum of money can be raised
- Doesn’t need to be repaid
Disadvantages:
- Dividends have to be paid
- Expensive to advertise and organise
Debentures
Loans borrowed from individuals through the stock market that are repaid with annual interest.
Advantages:
- Control of the business is retained
- Paid back over a long period of time
Disadvantages:
- Interest must be paid annually
Bank Overdraft
Allows a business to spend more money than is in their bank account.
Advantages:
- Easy to arrange
- Business can continue to pay expenses
Disadvantages:
- High interest rates
- Only available for small sums of money
Trade Credit
Allows a business to buy goods from suppliers and pay for them at a later date.
Advantages:
- Business can make sales before having to pay for purchases
- Business can continue operating when cash flow is poor
Disadvantages:
- Can miss out on prompt payments discounts
- Suppliers may be reluctant to continue to offer trade credit if business does not pay within the agreed credit period
Debt Factoring
Selling unpaid customer debts to a factoring company.
Advantages:
- Saves time and effort
- Cash flow is improved by receiving advanced payment of the debts from the factor
Disadvantages:
- Customer debt has to be sold for a reduced amount
- Can only be done for large amounts of debt
Government Grant
Money is given to a business by the government.
Advantages:
- Doesn’t need to be repaid
- Offered as an incentive and can help a business start or expand
Disadvantages:
- Time consuming to apply for
- May have to meet certain conditions
Bank Loan
Loan of money from the bank that is paid back over time with interest.
Advantages:
- Can budget for repayments
- Quick and easy to arrange
- Paid back over a long period
Disadvantages:
- Has to be repaid with interest
- Small businesses can find it difficult to secure a loan
Hire Purchase
Purchasing an asset and paying for it in instalments over time.
Advantages:
- Expensive equipment can be bought with only an initial deposit
- Asset is owned at the end of the repayment period
Disadvantages:
- Business doesn’t own the asset until the last instalment is paid
- High interest rates
Mortgage
Money borrowed from the bank for the purchase of property that is paid back with interest over a long period of time.
Advantages:
- Paid back over a long period of time
- Low interest rate
Disadvantages:
- Interest has to be paid
- Has to be repaid
- Property isn’t owed until the last instalment is repaid
Venture Capitalists
Investment received in return for equity.
Advantages:
- Large amounts of finance can be raised
- Willing to take on risky investments
Disadvantages:
- Control of the business is given up
- A portion of profits is given up
Crowd-Funding
Small amounts of money from a large number of people is raised.
Advantages:
- Doesn’t need to be repaid
- Quick
- Access to a large amount of investors
Disadvantages:
- Low success rate
