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IB Business Management > Unit 3.1: Sources of Finance > Flashcards

Unit 3.1: Sources of Finance Flashcards

1
Q

State the importance of finance?

A

Almost half of ventures fail because of poor financial management.

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2
Q

Define finance

A

How to have money — how to manage the finance of the company

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3
Q

Describe what is personal finance

A

Money an individual has from:
- our own pockets
- borrows: banks or friends
- received from gov (grant — not loan)
- earned through products and services

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4
Q

Define equity

A

personal finance to fund a business

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5
Q

Differntiate grant vs loan

A

Grants doesn’t expect you to pay back

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6
Q

Define revenue

A

sales

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7
Q

Outline the sources for business finance

A
  • its own money.
  • gov grants.
  • revenue (from business ventures)
  • borrows (e.g. from banks)
  • venture capitalists
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8
Q

Define venture capitalists

A

Stockholders that support the company in order to be part of the company

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9
Q

How to obtain funding for a business project from investors

A

1.) Determine the capital needed to start a company

2.) Present a business plan to prove that you need the amt. of capital

3.) Offer interest/incentives for the investor’s contribution

4.) Make arrangements to pay back loan

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10
Q

Define capital

A

Money needed to start a business

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11
Q

Outline the two places where money is spent

A
  • capital expenditure
  • revenue expenditure (day-to-day operations)
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12
Q

Define capital expenditures

A

Money spent to acquire, improve or maintain capital (material assets/resources) to undertake new projects/investments

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13
Q

Define revenue expenditure

A

Money spent for the day to day operations
- (e.g. labor, rent, wages, raw materials, insurance and fuel)

ex: the workers and computers of an office

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14
Q

How do the three types if business finance their business (CONT.)

A
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15
Q

Why can it be good to get capital from a loan?

A

The risk is shared by owner and investor
- investors, via interest, gets money from you so they want to see the business to succeed.
- in bankruptcy, the government will protect the business via liquidation

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16
Q

Define liquidation

A

Turning business assets into actual money

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17
Q

Describe the process of liquidation

A

1.) The government will tell creditors to back off then assess the company then liquidate their assets

2.) government gets money -> creditors get money -> common shareholders -> owners

-> But the owners, if they don’t use their own money, will still have their personal finance.

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18
Q

What do banks do with your money? (DB)

A

They’ll invest it in other pursuits and invest these funds to pay you back

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19
Q

Outline the sources of finance (CONT.)

A

1.) Business growth (internal + external growth)

2.) Venture capital

3.) Business angels

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20
Q

Describe the internal sources of finance and growth

A

”organic growth” - natural development and expansion of business
- generating increasing sales
- use of retained profit
- sale of assets

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21
Q

Explain retained profits

A

The profits can be used elsewhere. The retrained profits are the profits kept inside the company

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22
Q

Why is the sale of assets risky as a source of finance?

A

Selling of assets will disable the company from continuing its production of goods and services (?wording)

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23
Q

Describe the business growth external (Long Term)

A

1.) Equity capital - money earned from the sale of shares

2.) Loan capital - money from financial institutions
- debentures
- bank loans
- merchant/investment banks
- Government grants

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24
Q

Define a share

A

A certificate that says you own part of a company

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25
Q

Describe the business growth External (Short term) (DOUBLE CHECK USING PPT.)

A

Mergers, Acquisitions, Joint Ventures, Strategic Alliance

26
Q

Outline the types of external sources of finance

A

1.) Long term - may be paid back after many years

2.) Short term - used to cover fluctuations in cash flow

3.) ‘Inorganic Growth’ - growth via acquisition

27
Q

Compare and contrast mortgages and bank loans

A

Similarities
- Mortgages are a loan

Differences
- Mortgages have a collateral

28
Q

Define mortgage loan

A

A loan secured by real property

29
Q

Explain what are merchant or investment banks?

A

Act on behalf of clients to organize and underwrite (guaranteeing the sale of new securities for investors) raiding finance (acquiring companies via large debt for the purchase)
- for high-net individuals or corporations rather than general public

30
Q

Describe THE DIFFERENT short term loans [4]

A

1.) Bank loans - paying interest on payment AND
- fast: repayment periods from 1+ years

2.) Overdraft facilities - the right to be able to withdraw funds that you do not currently have
- provides flexibility for firm
- interest only paid on the amt overdrawn
- overdraft limit/credit - the max limit to be withdrawn; must be depositor of a bank

3.) Trade credit - Strike a deal with a supplier wherein you don’t have to pay cash / promise to pay at a later date (credit)

4.) Factoring - Go to a factoring company, sell credits for them to get the money now from ppl who owe you.
- for immediate

5.) Leasing - Lending a capital to get money

31
Q

What are the two types of acquisitions?

A

1.) Merger - A + B = C

2.) Acquisition/Takeover - pacman

32
Q

Describe what are business angels

A

Philanthropists that help small businesses/start ups and they give a small interest
- may or may not ask for ownership equity
- will get ownership if not paid

33
Q

Describe what are venture capitals (CONT.)

A

Very professional, looking for investment opportunities usually for smaller businesses and start ups — private equity
- needs a deed of credit w/ business plan (bc gonna be using a lotta money)
- aims to gain part of company

34
Q

Outline the factors influencing the choice of source of income

A
  • purpose or use of the funds
  • all costs involved in source of finance
  • status and size of the company (e.g. banks only accept LC’s, missed loans)
  • amt required
  • flexibility in switching from one source to another
  • state of external environment (bad -> high i%)
  • gearing
35
Q

Define credit

A

An agreement wherein the buyer can obtain goods/services and promise to pay them later

36
Q

Define gearing

A

How well the company makes use of money

37
Q

Outline the three major issues to be considered when choosing a source of finance

A

1.) Can this finance be raised through internal sources?

2.) If external, debt or equity?

3.) What form will the finance be raised (e.g. bonds, shares, cash. etc.)

38
Q

Why is it good to get a long term loan? (EDIT)

A

Ofc it may depend BUT the depreciation rate for long-term loans

39
Q

Define bonds

A

Binds are a type of “loan” wherein a company pays another company and the other company has to pay them back

40
Q

Define credit line

A

the total amount of credits to pay

41
Q

Define capital investment

A

expenditure to fund a business’ long term growth

42
Q

Define crowdfunding

A

when a business is funded by a larger number of people contributing small amount of money each

43
Q

Give the advantages of crowdfunding

A
  • crowdfunding provides access to thousand of investors who can see, interact with and share a project’s fundraising
  • good marketing via online platforms
  • opportunity for feedback and guidance
  • business maintains full control — business decides how to structure the campaign, how much to ask for and how to operate
  • good alternative finance option
44
Q

Give the disadvantages of crowdfunding

A
  • strong competition
  • subject to scrutiny if public upset
  • fees need to be paid
45
Q

Describe share capital [3]

A
  • equity capital — sale of shares;
  • buyers of shares;
  • public limited companies sale shares via stock exchange;
46
Q

Define loan capital

A
  • aka debt capital;
  • money sourced from financial institutions;
47
Q

Define credit limit

A

The amount of money you’re allowd to borrow
(usually based on your deposits — e.g. if you have 5 mil deposit, you can withdraw 5 mil)

48
Q

List the interna; sources of finance

A
  • Retained profit (long)
  • Personal funds (short)
  • Sale of assets (short)
49
Q

Give the two types of external sources of finance

A
  • short term
  • long term
50
Q

List all the short term sources of finance

A
  • bank overdraft
  • hire purchase
  • trade credit
  • leasing
  • debt forecasting
51
Q

Name all the types of loan capital

A
  • mortgage
  • debentures
  • business angels
  • venture capitalists
  • bank loans
52
Q

What is factoring?

A

Business Sells Invoices: A business sells its unpaid invoices to a factoring company.

Gets Immediate Cash: The business gets cash now (less than invoice total).

Factor Collects Payments: The factor collects the full invoice amount from customers.

Factor’s Fee: The factor keeps the difference as their fee.

53
Q

Hire purchase

A

Financial arrangement where an individual or business acquires an asset through a series of payments, and ownership of the asset is transferred only after all payments have been made. Here’s how it works and what it involves:

54
Q

Overdrafts

A

allows a business to temporarily overdraw on its bank account, i.e., tto take
out more money than it has in its account.

55
Q

Debentures

A

Creditor of the company, not an owner.
- This means that holders are entitled to an agreed fixed rate of return, but have no voting rights and the amount borrowed must be repaid by the expiry date.

56
Q

Who can raise funds from the sale of shares and debentures?

A

Limited companies only
- Because it’s more secure—imagine you have no control over a block of dice but the person who dealt you a block of dice has a lot of resources. You’d feel more secure.
- Asides from that it’s so the burden of paying back the debentures rest on the company’s hands instead of the owners (good to separate personal funds and assets)

57
Q

Grants vs. Subsidies

A

Both of these involve companies giving businesses money but grants are usually one-time and for specific projects whereas the subsidies are for industries and are ongoing

58
Q

What are the advantages and the disadvantages of a hire purchase

A

Advantages:
- quick and easy to get equipment

Disadvantages:
- interest rates are higher
- the good can be taken away from the buyer if their payment is late

59
Q

Advantages and disadvantages of a lease

A

Advantages:
- No large sums of money
need to be allocated for
the purchase of the
equipment.
- Useful when equipment
is used occasionally.
- Maintenance is not the
responsibility of the user.

Disadvantages:
- in the long term, more expensive than the outright purchase
- interest rates are higher
- not able to secure any loans with another institution on assets that are leased

60
Q
A

IB Business Management (18 decks)

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