Unit 4.1 - sources of finance Flashcards
Define bank loan.
Money lent to a business from the bank that is repaid for a set period of time with interest
Define friends and family loan.
Money provided to the business from family or friends either directly to the entrepreneur or into the business
Define overdraft.
An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero
Define retained profit.
Money that is kept from the previous year’s profits rather than given to the owners or shareholders
Define share capital.
Money raised by a business through the sale of shares in the business
Define venture capital.
Money put up by a person or business that is willing to take the risk of financing a new or small business
Define leasing.
Similar to renting a piece of equipment or machinery. The business pays a regular amount for a period of time, but the item belongs to the leasing company
Define trade credit.
A source of finance that allows a business to obtain raw materials and stock but pay for them at a later date. The credit period is usually between 30 and 90 days
Define debt factoring.
Selling debt to another company at a cut price
Define hire purchase.
An arrangement whereby the business agrees to a contract to acquire an asset by paying an initial instalment and repays the balance of the price of the asset plus interest over a period of time – doesn’t own the item until all payments are made
Define selling assets.
When an established or large business sells goods that it no longer requires, such as equipment, machinery or vehicles
Define owners funds.
Money that is put into the business from the private savings of the owners
Define government grant.
Money provided by the government to support a business for a specific purpose
Define mortgage.
Money provided by a bank or building society to help a business purchase a property
Name the internal source of finance. (3)
Selling assets
Retained profit
Owners funds
Name the external source of finance. (11)
Bank loan
Family and friends loan
Overdraft
Share capital
Venture capital
Leasing
Trade credit
Debt factoring
Hire purchase
Government grants
Mortgage
Name the advantages (1) and disadvantages (1) of retained profit.
This is the cheapest source of finance because it is money that belongs to the business and no interest will be charged
There are often limited amounts of capital available because there are other demands on profit such as paying dividends to shareholders or investing in other business activities (opportunity cost exists)
Name the advantages (4) and disadvantages (4) of selling assets.
Once the assets are sold, the money is instantly available to be used. This is suitable for large businesses as they are likely to have old assets that may need to be replaced or renewed
No interest is charged
Owners keep control of the business
No longer need to pay storage for the assets
It can take a long time to access money because it can be difficult to sell assets. This may lead to missed business opportunities.
In addition, small businesses are unlikely to have assets to sell because they may need all of their assets or wish to pursue growth
Don’t get back the value spent on the asset
Might not raise enough funds
Name the advantages (4) and disadvantages (2) of owners funds.
Readily available.
No interest charged.
Money does not have to be repaid.
Owner keeps control of the business.
Likely to be a small amount (insufficient)
Money not available to be spent elsewhere
Name the advantages (2) and disadvantages (2) of family and friends loan.
No interest needs to be paid.
Flexible repayments.
Likely to be a small amount (insufficient)
Repayment may be needed with little notice
Name the advantages (2) and disadvantages (3) of trade credit.
The advantage of this type of financing is that the credit period allows a company to make a payment after converting raw materials and stock into goods, selling them to its own consumers and receiving payment.
No interest is paid on the credit.
If payments are missed, it can lead to extra costs and poor relationships with suppliers. This may lead to difficulty accessing stock in the future.
Amount will be small.
Very short term form of finance.
Name the advantages (1) and disadvantages (1) of debt factoring.
This will help to improve cash flow by receiving capital instantly that may otherwise have taken a long time to access.
The business will not receive the full value of the invoice because the factoring company takes a share of the money owed by customers.
Name the advantages (2) and disadvantages (3) of overdraft.
This is a good way to cover short-term cash flow problems and it is a flexible source of finance because it will only be used in emergencies.
Interest is only paid on the overdrawn amount.
Overdrafts can become expensive due to the high interest rates charged by banks.
In addition, the bank can demand full repayment within a short period of time.
Not suitable for expensive purchases.
Name the advantages (2) and disadvantages (2) of venture capital.
Large sums of money can be provided
More importantly, the investor is experienced in business and will be a valuable source of support and advice. For example, they may have business contacts which will help the business gain customers or new suppliers.
The venture capitalist will want a return on their investment in terms of a share of the profits
As well as input into how the business is run (a role in decision making).