unit 5: chapter 28- business finance Flashcards
give 3 long term sources of finance
share issue, debentures, long term loan, grants
give 3 medium term sources of finance
leasing, hire purchase, medium term loan
give 3 short term sources of finance
bank overdraft, bank loan, creditors, factoring
name 2 internal sources of finance
retained profit, sales of assets, reductions in working capital
name 4 external sources of finance
share issue, debentures, long term loans, grants, leasing, hire purchase, medium term loan, bank overdraft, bank loan, creditors, factoring
what is an overdraft
bank agrees to a business borrowing up to an agreed limit when required
what is factoring
selling of claims over trade receivables to a debt factor in exchange for immediate liquidity, only a proportion of the value of the debts will be received as cash
what is hire purchase
an asset is sold to a company that agrees to pay fixed repayments over an agreed time period, the asset belongs to the company
what is leasing
obtaining the use of equipment or vehicles and paying a rental or leasing changeover a fixed period, this avoids the need for the business to raise long term capital to buy the asset, leasing company has ownership
what is equity finance
permanent finance raised by companies through sale of shares
what are long term loans
loans that don’t have to be repaid for at least a year
what are long term bonds/ debentures
A bond functions as a loan between an investor and a corporation. The investor agrees to give the corporation a certain amount of money for a specific period of time. In exchange, the investor receives periodic interest payments.
define rights issue
existing shareholders are given the right to buy additional shares at a discounted price
what is crowd funding
the use of small amounts of capital from a large number of individuals to finance a new business venture
define venture capital
risk capital invested in business start ups or expanding small businesses that have good profit potential but can’t gain finance from other sources eg. bank
name 3 reasons why businesses require finance
- setting up a business will require cash injections from owners to purchase equipment and premises
- finance their working capital
- expansion requires further finance eg, takeover
- external factors require greater finance eg. reduction in sales
- apart from fixed assets it is needed for new product production
define start up capital
the capital needed by an entrepreneur to set up a business
define working capital
the capital needed to pay for raw materials, day to day running costs, credit offered to customers
how do you calculate working capital
current assets- current liabilities
define capital expenditure
purchase of assets that are expected to last more than one year eg. machine
define revenue expenditure
spending on all costs and assets other than fixed assets and includes wages, salaries, raw materials
why is the use of the source of finance and the time period it is required significant
- very risky to borrow long term finance for short term needs
- permanent capital may be needed for long term business expansion
- short term finance can help increase stock or pay creditors
why is the cost of a source of finance significant
- obtaining finance is never free as even internal sources have an opportunity cost
- loans can be very expensive in high interest rate times
- stock exchange floatation can cost millions in fees and promotion of the share sale
why is the amount of a source of finance required significant
- share issues and sales or debentures would generally only be used for large capital sums
- small bank loans or reducing trade receivables payment period could be used to raise small sums
why is the legal structure and desire to retain control significant when deciding the correct source of finance
- share issues can only be used by limited companies and only public companies can sell one the stock market but they will lose some control
- if owners want to retain costs/ control fully then sales of shares would be unwise
why is the size of existing borrowings significant when deciding on a source of finance
- the higher the existing debts of the business the greater the risk of lending more so banks and other lenders may not help
why is flexibility significant when deciding on a source of finance
- when a firm has a variable need for finance eg, the business has a seasonal pattern of sales and cash receipts then a flexible source of finance is best
