Unit 5.2 Sources of finance Flashcards
Why would a business need finance?
1) Establish a new business start-up, which means spending money on capital equipment, recruiting workers and marketing activities
2) Fund expansion when a business grows in size
3) Run business recruitment, paying for the recruitment costs
4) Develop marketing activities
Why are not all sources of finance available to every business?
1) Sole traders and partnerships are not able to raise finance by selling shares
2) Limited companies cannot take extra partners in the hope of raising more finance
3) Businesses with a poor financial record are unlikely to find many banks willing to lend money to them
What are internal sources of finance?
1) Owners capital
2) Sale of fixed assets
3) Retained profit
What are external sources of finance?
1) Overdraft
2) Trade credit
3) Bank loan
4) Crowdfunding
5) Taking on a new partner
6) Share issue
What is the type and availability of finance for owners capital?
Short, medium or long term, sole trader and partnerships
What is the type and availability of finance for retained profit?
Medium or long term, all businesses
What is the type and availability of finance for sale of assets?
Short, medium or long term, all businesses
What is the type and availability of finance for overdraft?
Short term, all businesses
What is the type and availability of finance for trade credit?
Short term, al businesses
What is the type and availability of finance for taking on a new partner?
Long term, partnerships only or sole traders who become partnerships
What is the type and availability of finance for a loan?
Medium or long term (depends on the period of the loan)
What is the type and availability of finance for share issue?
Long term, limited companies only
What is the type and availability of finance for crowdfunding?
Medium or long term, all businesses
How long would short term be?
Up to 12 months
How long would medium term be?
1 to 5 years
How long would long term be?
5 years or more
What are the advantages of owners capital?
1) No need to repay the money
2) No interest has to be paid
3) No cost to raise the finance
What are the disadvantages of owners capital?
If the owner or owners do not have enough savings, they will need to use another source of finance as well
What are the advantages of retained profit?
1) No interest has to be paid
2) No need to repay the money
3) No cost to raise the finance
What are the disadvantages or retained profit?
Only available to businesses that have made profits
What are the advantages of sale of assets?
Good if the asset is no longer of use to the business
What are the disadvantages of sale of assets?
1) Can take time to sell the asset
2) May not be possible to find a buyer
What are the advantages of overdraft?
1) An overdraft can meet short term cash flow problems
2) The business can continue trading in the short term
3) The size of the overdraft varies monthly and interest is paid only on the amount borrowed
What are the disadvantages of overdraft?
Interest is charged on the daily amount of money that the business owes to the bank. It can be expensive
What are the advantages of trade credit?
1) This source of finance allows the business buying the goods to sell them on to a customer before payment is made to the supplier
2) It helps businesses that may have a temporary shortage of funds- a cash flow problem
3) The period of credit is usually interest free
What are the disadvantages of trade credit?
1) The goods must be paid for even if they do not sell
2) Interest is charged if the credit is not repaid within the time limit
What are the advantages of taking on a new partner?
1) A new partner may bring new skills to the business
2) No cost to raise the finance
What are the disadvantages of taking on a new partner?
1) The new partner will have a say in the running of the business
2) The new partner will be entitled to a share of any profits
What are the advantages of a loan?
1) Repayment is spread over time
2) Business knows the amount to be paid in instalments which helps budgeting
What are the disadvantages of a loan?
1) Interest has to be paid
2) Business may need to risk an asset as security
What are the advantages of share issue?
1) A lot of finance can be raised from many investors
2) Money does not have to be paid back
3) No interest is payable
What are the disadvantages of share issue?
1) Dividends may have to be paid on the shares to shareholders
2) Shareholders are entitled to have a say in the running of the company
3) They business may be taken over and existing shareholders no longer own the business
What are the advantages of crowdfunding?
1) A lot of money can be raised from a lot of contributors
2) Used for start-up or expansion
3) No security is needed for loans
What are the disadvantages of crowdfunding?
1) Interest will need to be paid on loans
2) Profits may need to be shared if equities are sold
What is interest?
The amount of money that has to be paid on borrowed money
What is security?
Something of value that is offered to a lender as a form of guarantee of payment
What are loans?
Sums borrowed for a certain period at an agreed rate of interest
What is overdraft?
An arrangement with a bank that a business can spend more money than it has in its account
What is trade credit?
When a supplier allows a business to receive the goods now that it can sell and then pay for it later
What is retained profit?
Profit that is not distributed to shareholders as dividend
What is sale of assets?
Items sold by the business
What is share issue?
Money raised from investors by selling new shares
What is crowdfunding?
Money raised through an appeal to the public, money raised from ‘sponsors’ or ‘donors’
