Unit 5 Finance PT1 Flashcards
define retained profit and describe it
This is profit that the business has effectively saved whilst it has been operating (running).
Retained profit is a cheap source of finance because a business does not have to pay any interest.
Retained profit is limited. A business can only spend profits that have been saved.
Retained profit may not be high enough to fund big, long-term projects
define selling assets and describe it
A business can sell its assets to raise cash. For example, a business can sell buildings or machinery that they do not use.
They are usually a cheap source of finance because the business does not have to pay interest.
However, selling assets can harm a business’ operations.
define personal savings and describe it
This is personal money that is invested by the owner of a company.
It is most relevant for start-up businesses, in which the entrepreneur has saved up to fund their business venture.
A downside is that it can be very risky for an entrepreneur to put a significant amount of their personal savings into a business. They may not be able to afford this.
define share capital and describe it
A firm can sell share capital (some of its shares) to other people or companies. They give away a percentage of the company in return for getting finance invested in the business.
Public limited companies may do new share issues, creating shares and issuing them to investors through a stock market .
Private limited companies can sell share capital (shares) to family, friends, or even a private equity company.
Venture capital funds buy share capital in early-stage start-ups in exchange for cash to fund the growth of the business.
define Government grants and describe it
A government may give grants (money) to companies to research things that the government is interested in.
The Horizon 2020 fund is a set of grants given out by the countries in the European Union.
define trade credit and describe it
Trade credit describes when firms pay suppliers at a later date. It involves buying something now and paying for it later.
define and describe overdraft
The founders of a business could use an overdraft on their personal or business bank account.
An overdraft is effectively a loan from a bank that you have to pay interest on.
define and describe crowdfunding
Crowdfunding refers to raising finance by allowing large numbers of people to donate often small sums of money to a project or venture This source of finance has advantages and disadvantages:
Crowdfunding means that a business owner can retain their existing ownership as the source of finance does not require the sale of shares or the transfer of some ownership
.Crowdfunding can take a long time and maybe unsuitable for businesses that need to access funding quickly.
define and describe loans from family and friends
Start-ups often use loans from family and friends. This is usually because the entrepreneur doesn’t have enough personal savings to finance the investment.
If the entrepreneur gives up equity (a share of the business) then this is not a loan.
define and describe bank loans or mortgages
Bank loans and mortgages are very important for many businesses. A business borrows money from a bank and then pays interest on the money borrowed.
It is often harder for new businesses to get bank loans because banks see them as riskier.
New vs established business
A company’s size and track record can affect the availability and cost of finance.
New businesses are likely to find it harder to get loans from a bank but can take advantage of hire purchases and trade credit.
Established companies are also much more likely to be larger and therefore require larger investments.
External sources of finance are preferred when the size of the investment is large as internal sources of finance are often limited.
Long-term vs short-term
The length of time that finance is needed affects which type of finance is best.
Trade credits are an example of short-term finance. A supplier is likely to only give the business an extension of a few days or weeks.
Bank loans and mortgages are a long-term source of finance and may only be paid back in full after 20 years.
Financial situation
Whether a business is in a good financial situation can impact the availability and cost of finance.
A business that is struggling may not be able to get loans as it is much more likely that they won’t pay them back. Even if they are able to get loans, these loans will have much higher interest payments.
A business that is struggling is also less likely to be able to use internal sources of finance.
Fixed costs
Fixed costs don’t vary as the company changes its output.
Variable costs
Variable costs are the costs that change directly with output (they change as a company changes output).
