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Busniess > 311 The need for finance STUDENT > Flashcards

311 The need for finance STUDENT Flashcards

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1
Q

What are the two main types of finance needs for a business?

A

Short-term needs and long-term needs

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2
Q

What is an overdraft?

A

An overdraft is a short-term borrowing facility allowing a business to withdraw more money than it has in its current account.

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3
Q

Name one advantage of using an overdraft.

A
  • Extremely flexible
  • Interest is paid only on the amount used
  • No security usually required
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4
Q

Name one disadvantage of using an overdraft.

A
  • Higher interest rates than loans
  • Banks can demand immediate repayment
  • May not be available until the business is established
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5
Q

What is retained profit?

A

Retained profit is the profit a business keeps after trading, used for reinvestment.

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6
Q

What are some sources of long-term finance?

A
  • Retained profit
  • Bank loan
  • Venture capital
  • Share capital
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7
Q

What are the characteristics of a business loan?

A

A lump sum borrowed from a lender that must be repaid with interest.

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8
Q

True or False: A loan can require security.

A

True

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9
Q

What is venture capital?

A

Venture capital is financing from private individuals, often in exchange for equity in a startup or small business.

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10
Q

Name one advantage of venture capital.

A
  • Provides growth capital
  • Brings knowledge and experience
  • Takes on high-risk businesses
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11
Q

Name one disadvantage of venture capital.

A
  • Owners may lose control of the business
  • Venture capitalists may require a large share of the business
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12
Q

What is share capital?

A

Share capital is money raised by a limited company through the issuance of shares.

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13
Q

What is the difference between a private limited company and a public limited company regarding share capital?

A

A private limited company can issue shares to friends and family, whereas a public limited company can sell shares on the stock market.

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14
Q

What is one advantage of raising money through share capital?

A
  • No repayment or interest is required
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15
Q

What is a key characteristic of shares?

A

Shares represent ownership of a business.

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16
Q

Fill in the blank: A business owner may need finance to help them _______.

A

[start-up or expand]

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17
Q

Name two suitable sources of finance for a sole trader start-up.

A
  • Personal savings
  • Venture capital
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18
Q

What kind of finance might a business seek for expansion?

A
  • Share issue
  • Bank loan
  • Retained profits
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19
Q

True or False: A start-up business can have retained profits.

A

False

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20
Q

What is the definition of finance?

A

Finance means the management of the investment needed to open, run and grow a business.

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21
Q

What are the two main types of finance methods?

A
  • Internal finance methods
  • External finance methods
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22
Q

What are some reasons for raising finance?

A
  • To pay debts
  • To help a business over a slow trading period
  • To expand
  • To start up a business
  • To buy stock from a supplier
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23
Q

What is personal savings also called?

Study These Flashcards
A

Owners’ equity or owners’ capital.

24
Q

What does personal savings represent in a business?

Study These Flashcards
A

The stake the owner has in the business.

25
What is retained profit?
Profits that a business may re-invest into the business to help it grow.
26
What is an advantage of retained profits?
There is no interest to pay.
27
What is a disadvantage of retained profits?
Once retained profit is used, it has gone and cannot be used elsewhere in the business.
28
How can a business raise finance through selling assets?
By selling items that they already own, such as machinery, land, premises, or vehicles.
29
What happens to the asset when a business sells it?
The business will no longer have the benefit of that asset, and it will not appear on the balance sheet.
30
Fill in the blank: This form of internal finance is suitable for sole traders and partnerships: _______.
Personal savings
31
Fill in the blank: This form of finance would be suitable for an established business: _______.
Retained profit
32
Fill in the blank: This form of finance would be suitable for a business that has spare resources: _______.
Sale of assets
33
What is a consolidation loan used for?
To pay debts, likely to pay off suppliers.
34
What might a business apply for during a slow trading period?
An overdraft.
35
What might a business need to start up?
A loan with a business plan or investment from friends and family.
36
What is external finance?
Investment for the business obtained from banks, investors, and lenders outside of the business ## Footnote External finance includes various forms such as overdrafts, loans, and venture capital.
37
What is an overdraft?
Short term lending of smaller amounts of money arranged by the bank ## Footnote An overdraft allows a business to cover shortfalls until sales improve.
38
What are the advantages of an overdraft?
* Arranged easily by phone or online * Interest paid only on the overdrawn amount * Can be paid back quickly when trading improves ## Footnote This makes overdrafts a flexible option for short-term financial needs.
39
What are the disadvantages of an overdraft?
* Can incur heavy charges if unauthorized * Very expensive with high interest rates * Not suitable for large amounts over long periods ## Footnote Businesses should be cautious when relying on overdrafts.
40
What are trade payables?
Amounts billed to a company by its suppliers for goods or services used ## Footnote Trade payables are a current liability that must be settled within one year.
41
What are the advantages of trade payables?
* Sell goods before payment is due * No interest on trade credit * Builds supplier relationships for better deals ## Footnote This allows businesses to manage cash flow effectively.
42
What are the disadvantages of trade payables?
* Limited availability of stock for trade credit * Risk of losing credit if payments are late ## Footnote Timely payments are crucial to maintaining supplier relationships.
43
What is loan capital?
Money borrowed from a bank, akin to 'renting' money ## Footnote Loan capital is often not available to new businesses without a track record.
44
What are the advantages of loan capital?
* Fixed repayment schedule * No ownership stake required by banks * Straightforward application process ## Footnote This allows for better financial planning.
45
What are the disadvantages of loan capital?
* Interest increases borrowing costs * Inflexible with penalties for early settlement * Requires collateral ## Footnote Businesses must weigh these factors when considering loans.
46
What is share capital?
Finance raised by issuing ordinary shares in a public limited company (PLC) ## Footnote Share capital is a long-term financing method suitable for larger businesses.
47
What are the advantages of share capital?
* Attracts investors for growth * More cost-effective than loans * No interest repayment ## Footnote Share capital helps businesses grow without increasing debt.
48
What are the disadvantages of share capital?
* Requires extensive background information for investors * Profits must be shared as dividends * Can be a slow and costly process ## Footnote These factors can complicate raising funds through share capital.
49
What does stock market flotation mean?
Converting a private limited company to a public limited company to sell shares to the public ## Footnote Flotation can enhance a company's reputation and trust among investors.
50
What is venture capital?
Private investment provided for start-ups or small businesses with growth potential ## Footnote Venture capitalists typically take a small percentage of shares in exchange for funding.
51
What are the advantages of venture capital?
* Supports high-tech start-ups * Invests in high-growth potential companies * Willingness to take on high-risk ventures ## Footnote This type of funding is crucial for innovative businesses.
52
What are the disadvantages of venture capital?
* Pressure on owners for high profits * Loss of control for business owners ## Footnote These factors may conflict with long-term business goals.
53
What is crowdfunding?
A method of raising money from a large number of people via online platforms ## Footnote Crowdfunding is often used by start-ups to access alternative funding.
54
What are the advantages of crowdfunding?
* Alternative to loans * No upfront fees required * Generates funds while promoting the business ## Footnote This can be an effective way to gauge market interest.
55
What are the disadvantages of crowdfunding?
* Requires showcasing ideas to attract investors * May need promotional materials ## Footnote This can present a challenge for some businesses.

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