Unit 3 - Finance - Sources of Finances Flashcards
What is a bank overdraft?
A bank overdraft is when a business takes out more money than it has in its bank account.
What are the advantages of a bank overdraft?
- Allows a business to take out more than it has in its bank account
- Useful for addressing short-term cash flow issues
What are the disadvantages of a bank overdraft?
- Daily interest or daily charges may apply
- Not useful for addressing long-term cash flow problems
What is a bank loan?
A bank loan is when a business borrows money from a bank and repays it over a specified period of time in regular installments with interest.
What are the advantages of a bank loan?
- Easier to budget with regular repayments
- Can be taken out over a long period of time
What are the disadvantages of a bank loan?
- Interest can be expensive, making monthly repayments costly
- Can affect credit ratings if repayments are missed
What is a government grant?
A government grant is money given to a business by the government that does not have to be repaid.
What are the advantages of a government grant?
- Does not need to be repaid
- Can generate good publicity for the business
What are the disadvantages of a government grant?
- Usually a one-off payment
- May come with strict conditions (e.g., location or employee requirements)
- Can be time-consuming due to extensive paperwork
What is hire purchase?
Hire purchase is paying for an item with regular installments, usually with an initial deposit required.
What are the advantages of hire purchase?
- Easier to budget with regular payments
- Can be taken out over a medium/long-term
- The business owns the item after the final payment
What are the disadvantages of hire purchase?
- Interest is charged on top of regular repayments
- The item is not owned until the final payment is made
- Risk of repossession if repayments are not made
What is leasing?
Leasing is when a business rents an item, such as IT equipment or vehicles, for a set period.
What are the advantages of leasing?
- Easier to budget with regular payments
- Items can be upgraded at the end of the lease period
What are the disadvantages of leasing?
- The business does not own the leased item
- Can be more expensive than hire purchase or a bank loan
What is a mortgage?
A mortgage is a long-term loan used to buy property or land, usually repaid over 20-25 years.
What are the advantages of a mortgage?
- Long repayment period
- Easier to budget over time
What are the disadvantages of a mortgage?
- Risk of repossession if repayments are missed
- Interest must be paid in addition to the loan amount
What is a loan from family/friends?
A business borrows money from a family member or friend, often with no interest.
What are the advantages of a loan from family/friends?
- No interest required
- Can be an option if the business is denied a bank loan
What are the disadvantages of a loan from family/friends?
- Can lead to personal disagreements
What is a share issue?
Selling shares to existing or new shareholders; only available to private limited companies (Ltd).
What are the advantages of a share issue?
- Can raise a large amount of capital
What are the disadvantages of a share issue?
- Expensive to issue new shares
- Private companies can only have a maximum of 50 shareholders
What are personal savings in business finance?
Money invested by a sole trader or partner from their own bank account into their business.
What are the advantages of using personal savings?
- Does not need to be repaid
What are the disadvantages of using personal savings?
- Limited amount of money available
- Once spent, it cannot be used again
What is trade credit?
A supplier allows a business to receive goods and delay payment for a set period.
What are the advantages of trade credit?
- Helps cash flow by allowing goods to be sold before payment is due
What are the disadvantages of trade credit?
- Not always available to new businesses
- Late payments can result in penalties
What is debt factoring?
A business sells its unpaid invoices (debts) to a factor that specializes in recovering them.
What are the advantages of debt factoring?
- Helps improve cash flow by getting immediate funds
What are the disadvantages of debt factoring?
- The business receives less money than the actual debt value
