Unit 3.2 Sources of finance Flashcards
Internal sources of finance
- Personal funds
- Retained profit
- Sale of assets
Personal funds
a source of finance for sole traders that come mostly from their personal savings
advantages
- have full control over profits
- know exactly how much money is available to run the business
disadvantages
- large risk on owners
- if not sufficient, difficult to start and run the business
- permanent source
Retained profit
profit that remains after shareholders have paid out dividends to shareholders
advantages
- no interest costs incurred
- have full control over profits
- flexible
- permanent source
disadvantages
- startups don’t have
- if too low not enough for expansion (economies of scale)
- high retained profit may look unattractive (low dividends paid)
Sale of assets
when a business sales its unused or unwanted assets to raise funds
advantages
- cash tied up in not-used assets
- no interest costs incurred
- permanent source
disadvantages
- startups don’t have
- time-consuming to find a buyer
External sources of finance
- Share capital
- Loan capital
- Overdraft
- Crowdfunding
- Trade credit
- Leasing
- Microfinance
- Business angels
Share capital
money raised from the sale of shares in a limited company
advantages
- permanent source
- no interest costs incurred
disadvantages
- shareholders are expected to be paid dividends when profit is made
- for public limited companies ownership may be diluted
Loan capital
money sourced from a financial institution (bank) with interest charged on the loan to be repaid
advantages
- repayment is spread out
- quick and accessible
- full control over ownership
- large businesses can negotiate high interest
disadvantages
- interests have to be paid
- variable rates increase
- collateral required before lends
- seizure of assets if failure to pay
Overdraft
when lending institutions allow firms to withdraw more money than they currently have in their account
advantages
- they can spend more money
- cheaper than loan capital
disadvantages
- request to pay back can be on a short notice
- change interest rates
Trade credit
an agreement between businesses that allow the buyer of the goods and service to pay the seller late
advantages
- better cash flow
- interest-free
disadvantages
- loose opportunities for discounts
- delaying could result in poor relation
Crowdfunding
when a business venture or project is funded by a large number of people each contributing a small amount of money
advantages
- a valuable form of marketing
- access to a wide range of investors
disadvantages
- platform fees to be paid
- string competition
- subject to rejection
Leasing
a source of finance that allows a form to use an asset without having to purchase it in cash
advantages
- useful if required occasionally
- no need for high capital
disadvantages
- can turn out to be expensive
- can’t act as collateral
Microfinance
institutions that provide banking services to low-income or unemployed individuals or groups who would otherwise have no other access to financial assistance
advantages
- promotes entrepreneurship
- no need for collateral
- less formal and can assess financial emergencies
disadvantages
- difficult to provide low interests
- offer small loans
Business angels
highly affluent individuals who provide financial capital to small startups or entrepreneurs in return for ownership equity in their business
advantages
- more open to negotiation
- no interest costs incurred
- offer valuable knowledge
disadvantages
- may assume high degree of control
- may expect a substantial return
Short term finance
money needed for the day-to-day running of a business
external:
- expected to be paid back within 12 months
- bank overdrafts, short-term loans and trade credits
Long term finance
funding obtained to purchase long-term fixed assets
external:
- more than one financial year to repay
- long-term loans and share capital
