Unit 6- Finance Flashcards
Why do new businesses need to raise finance?
- To buy assets needed to operate the business - machinery, vehicles
- To pay for promotion that will be essential to let customers know about products - advertising
- To buy raw materials needed for the business to start trading - fuel
Why do existing businesses need to raise finance?
- To buy assets to increase sales and to grow - raw materials, machinery
- To invest in developing new products and promote them to customers.
- To make the business more efficient.
Examples of internal sources of finance
Retained profits
Selling unwanted assets
Trade credit
What are retained profits?
Retained profits are profits kept for use as a source of future finance.
What is selling unwanted assets?
Assets that the business no longer uses, and so sells it to raise finance.
Sales and leaseback- when business sells an asset, and then leases it back to use whenever.
What is trade credit?
A period of time which suppliers allow customers to pay after receiving the supplies.
Adv and Dis of trade credit
A ‘free’ source of finance.
Usually only available for up to 90 days.
ADV and DIS of selling assets
Money may be available quickly
Avoids interest charges.
Assets not available to business in the future.
Sales and lease back requires future payments to use the asset.
ADV and DIS of retained profits
Avoids paying interest on a loan.
Only available to profitable businesses.
Owners receive less of the profits.
ADV and DIS of loans from family and friends
Can be quick and easy to arrange.
There may be no interest payments.
Family and friends may have limited financial resources.
The money maybe be needed at short notice.
May have arguments between family members.
What is new share issue?
When a company sells additional shares in the business to raise finance.
ADV and DIS of a new share issue
Can raise large sums of finance.
• No interest payments.
Only available to companies.
• Shareholders will expect to receive part of profits as dividends.
• Owners may lose control of the business it they own less than 50 per cent of all shares.
ADV and DIS of loans and mortgages
Assets can be paid for over a long period of time.
• May be arranged relatively quickly.
Can be costly in terms of interest payments.
• Collateral (assets) may have to be provided for large loans.
What is an overdraft?
A flexible loan that can be used by a business whenever necessary up to an
agreed limit.
what is a loan?
An amount of money provided from the bank to the business, in return for regular payments which include interest rates. Short term -5 years
what is mortgage?
A loan from the bank that is used to buy land and buildings. Long term- 25 years
what is hire purchase?
Businesses pay for assets by making an initial payment then paying installments overtime.
What is government grant?
A sum of money given to an entrepreneur or business by the government for a specific purpose.
ADV and DIS of new share issue
-Can raise large sums of finance
-No interest payments
-Only available to companies
-Shareholders will expect to receive more profit as dividends.
-If they sell more than 50% of shares, owner may lose control over business.
ADV and DIS of overdrafts
-flexible- only paid for when needed.
-may be arranged relatively quickly.
-can be costly in terms of interest charges.
-bank may ask for repayment at short notice.
ADV and DIS of hire purchase
-Spreads the costs of assets.
-Assets are not owned until the final payment is made.
-Can have high interest payments.
DIS and ADV of government grants
-may not need to be repaid
-can provide finance for new businesses
-can require complex form to be completed.
-will only provide a part of the finance needed.
