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Business > UNIT 5 - Chap 22: Business finance: needs and sources > Flashcards

UNIT 5 - Chap 22: Business finance: needs and sources Flashcards

1
Q

What is the definition of Start-up capital?

A

Is the finance needed by a new business to pay for the essentials non-current (fixed) and current assets before it can begin trading

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2
Q

What is the definition of Working capital?

A

Is the finance needed by business to pay its day to day course.

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3
Q

What is the definition of Capital expenditure?

A

Is the money spent on non–current (fixed) assets which will last for more than a year

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4
Q

What is the definition of Revenue expenditure?

A

Is money spent on a day-to-day expenses which do not involve the purchase of long-term asset, for example, wages and rent.

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5
Q

What is the definition of Internal finance?

A

It’s obtained from within the business itself.

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6
Q

What is the definition of External finance?

A

Is obtained from sources outside of and separate from the business.

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7
Q

What is the definition of Micro finance?

A

Is providing financial services – including small loans – to poor people not served by traditional banks.

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8
Q

What is the definition of Crowdfunding?

A

Is finding a project adventure Park raising money from a large number of people who eat contribute a relatively small amount, typically via the internet.

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9
Q

The main 3 reasons why businesses need finance? (3)

A
  1. Additional working capital
  2. For Capital for expansion
  3. For start up captial
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10
Q

4 examples of Internal Finance? (4)

A
  1. Retained profit
  2. Sale of existing assets ​
  3. Sale of inventory to reduce inventory levels​
  4. Owner’s savings ​
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11
Q

What are the 2 benefits of using retained profit as internal finance? (2)

A
  1. No interest has to be paid on it, unlike a loan, leading to lower costs ​
  2. It does not have to be repaid (unlike a loan), leading to lower cash outflow​

​

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12
Q

What are the 2 benefits of using Sale of existing assets ​ as internal finance? (2)

A
  1. Makes better use of unused assets by gaining money from them​
  2. The money does not have to be repaid to anyone, unlike a loan​
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13
Q

What are the 2 benefits of using Sale of inventory to reduce inventory levels​ as internal finance? (2)

A
  1. Can reduce the costs of storing raw materials e.g. factory space​
  2. Reduces the amount of money tied up in inventory and so can be used for other things e.g. wages​
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14
Q

What are the 2 benefits of using owners savings as internal finance? (2)

A
  1. If they sell too much of their inventory, they may not have enough to produce enough products, reducing customer satisfaction​
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15
Q

What are the 2 drawbacks of using retained profit as internal finance? (2)

A
  1. Not suitable for a new business, as they have no profit from a previous year ​
  2. Shareholders may not be happy if more profit has been used as retained profit instead of giving it to them in the form of dividends. (may sell their shares a a result of this)​
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16
Q

What are the 2 drawbacks of using Sale of existing assets as internal finance? (2)

A
  1. May not get a significant of money for the asset if it has depreciated in value over time e.g. a vehicle​
  2. Not suitable for new businesses as they have no unused assets yet​
17
Q

What is the drawbacks of using Sale of inventory to reduce inventory levels​ as internal finance?

A
  1. If they sell too much of their inventory, they may not have enough to produce enough products, reducing customer satisfaction​

​

18
Q

What are the 2 drawbacks of using owners savings as internal finance? (2)

A
  1. It may not be enough (especially for sole traders)​
  2. Owners may not want to risk investing their savings into the business incase it fails​
19
Q

What are the 10 sources of finance?

A
  1. Overdraft
  2. Trade credit
  3. Leasoning
  4. Debenturns
  5. Microfinances
  6. Debt factoring
  7. Crowdfunding
  8. Grants from government
  9. Selling shares
  10. Bank loans
20
Q

What are the 2 benefits of a bank loan? (2)

A
  1. Can pay them back in installments, improving cashflow​
  2. Larger companies can negotiate lower interest rates​
21
Q

What are the 2 drawbacks of a bank loan? (2)

A
  1. Interest needs to be paid, leading to higher costs ​
  2. Security/collateral often needs to be provided e.g., a house. So if the loan is not repaid the house can be repossessed by bank. Risky for owners.​
22
Q

What are the 2 benefits of selling shares? (2)

A
  1. No interest has to be paid leading to lower costs ​
  2. Can obtain large amount of finance for expansion ​
23
Q

What are the 2 drawbacks of selling shares? (2)

A
  1. Shareholders will be expected to be paid dividends. Reducing the amount of profit left over for retained profit​
  2. If many shares are sold, the original owners may lose control of the company ​
24
Q

What is the benefit of grants from a government?

A
  1. Does not have to be repaid and no interest needs to be paid ​
25
Q

What is the drawback of grants from a government?

A
  1. May have to meet a certain criteria to obtain the loan e.g. firm must locate in a particular area and so are difficult to obtain ​
26
Q

What are the 2 benefits of crowdfunding? (2)

A
  1. No initial fees are needed. Only if you receive money from investments will the platform charge a percentage
  2. Allows them to see the public reaction of the product initially. If people are not willing to invest it is probably not a good business idea. ​
27
Q

What are the 2 drawbacks of crowdfunding? (2)

A
  1. Publicising the business idea could allow competitors to copy the idea and produce it and get it onto the market before them.​
  2. If the total amount requested has not been raised, they will have to return all donate money, wasting a lot of time. ​
28
Q

What is the benefit of microfinance?

A
  1. Suitable for entrepreneurs who do not have any assets to offer for collateral to a bank for a regular loan ​
29
Q

What is the drawback of microfinance?

A
  1. May not get enough finance from micro finance ​
30
Q

What are the 2 benefits of debt factoring? (2)

A
  1. Cash is now immediately available for the business as they have received in from the debtor company
  2. The business no longer has to waste time following up the debtors for the money- can spend this time elsewhere ​

​

31
Q

What is the drawback of debt factoring?

A
  1. The business does not receive the full 100% of the value of its debts from the debtor company. Therefore. less revenue for the business ​
32
Q

What is the drawback of debentures?

A
  1. Interest must be paid on these loans, increasing costs ​
33
Q

What is the benefits of debentures?

A
  1. Allows the business access to large amounts of finance that can be paid over a long period of time. E.g., 25 Years. This will help slow down cash outflow as it does not need to be repaid immediately.​
34
Q

What are the 2 benefits of leasoning? (2)

A
  1. The business does not have to find a large cash sum to purchase the asset to to start with so they down need to take out a bank loan.​
  2. The maintenance of the asset will be carried out by the leasing company, reducing costs for a business ​

​

35
Q

What is the drawback of leasoning?

A
  1. The costs of leasing an asset will be higher in the long run than purchasing the asset. E.g., if you lease a vehicle for 10 years, that will be more expensive by buying it outright. ​
36
Q

What is the benefit of trade credit?

A
  1. Cash flow improves as cash out flows are delayed in the short run, improving net cash flow in the short run. ​
37
Q

What is the drawbacks of trade credit?

A
  1. Suppliers often offer businesses discounts to pay straight away, meaning the business will miss out on this, increasing costs. ​
38
Q

What is the benefit of an overdraft?

A
  1. Allows the business to be able to pay day to day bills e.g. wages and suppliers even if they don’t have enough cash in their bank ​
  2. The bank can ask for the overdraft to be repaid on very short notice. ​
39
Q

What are the 2 drawbacks of an overdraft? (2)

A
  1. Interest will be charged on the overdraft ​

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