Unit 3.1 Introduction to finance and sources of finance Flashcards
What is Internal Finance?
Money raised from the business’s own assets or from profits left in the business (retained profits).
What is External Finance?
Money raised from sources outside the business (e.g. share issue, leasing, bank loan).
What is Retained Profit?
The profit left, after all deductions, including dividends, have been made. This is ‘ploughed back’ into the company as a source of finance.
What is an Overdraft?
Bank allows a business borrowing up to an agreed limit as and when required.
What is Debt-Factoring?
Selling of claims over debtors to a debt factor in exchange for immediate liquidity.
What is Hire Purchase?
Assets sold to companies that agree to pay fixed repayments.
What is Leasing?
Renting a product.
What is Venture Capital?
High risk capital invested in start-up businesses with good profit potential. Are not easy to obtain finance from other sources.
What are Business Angels?
Individuals who invest personal capital in a variety of businesses.
What are Subsidies?
Financial support from the government used to lower operating costs.
What is an Initial Public Offering?
Business converting its legal status to a PLC by selling its shares on the stock exchange.
What is Loan Capital?
Refers to medium to long-term sources of interest-bearing finance obtained from commercial lenders. Examples include mortgages, business development loans, and debentures.
What is Revenue Expenditure?
Refers to spending on the day-to-day running of a business, such as rent, wages, and utility bills.
What is Sale-and-Leaseback?
External finance: business sells a fixed asset but immediately leases it back.
What is Share Capital?
Money raised from selling shares in a PLC.
What is a Share Issue?
When a PLC raises finance by selling shares.
What are Sources of Finance?
The general term used to refer to where or how businesses obtain their funds, such as from personal funds, retained profits, loans, and government grants.
What is Trade Credit?
Allows a business to ‘buy now and pay later’. The credit provider does not receive any cash from the buyer until a later date (usually allowed between 30-60 days).
What is Capital Expenditure?
Investment spending on fixed assets such as the purchase of land and buildings.
What are Grants?
Government financial gifts to support business activities. They are not expected to be repaid by the recipient.
What are the benefits of Retained Profit?
- Cheap
- Permanent source of finance
- Flexible, can be used in a way the business deems fit
- Owners have control of their retained profit.
What are the limitations of Retained Profit?
- Startup businesses will not have any retained profit.
- If retained profit is too low, it may not be sufficient for growth.
- Owners may overuse retained profit.
- A high retained profit may mean that either little or nothing was paid out to shareholders as dividends.
What influences the choice of sources of finance?
Purpose or use of funds, cost, status and size, flexibility, state of external environment, gearing.
