3.2 sources of finance Flashcards
(17 cards)
Define internal sources of finance for a business.
Internal sources of finance are funds generated within the business, such as personal funds, sale of assets, and retained profits.
List three examples of internal sources of finance.
Personal funds (for sole traders), sale of assets, retained profit.
Describe external sources of finance for a business.
External sources of finance are funds obtained from outside the business, including share capital, loan capital, overdrafts, trade credit, crowdfunding, leasing, microfinance providers, business angels, and venture capital.
Explain share capital as a source of finance.
Share capital is finance raised by a company from selling shares in its business to investors.
What are loan capital options for businesses?
Loan capital options include bank loans, mortgages, and debentures, often with fixed long-term interest.
Define overdrafts as a source of finance.
Overdrafts permit an individual or business to borrow money up to an agreed limit at any time, providing short-term liquidity.
Describe trade credit as a source of finance.
Trade credit is a short-term finance arrangement where suppliers allow a business to pay for goods or services between 30 and 90 days after delivery.
What is crowdfunding in the context of business finance?
Crowdfunding involves raising small amounts of money from a large number of people, often via online platforms like Kickstarter.
Explain leasing as a financial arrangement.
Leasing involves paying for the use of an asset over a period rather than purchasing it outright.
Define microfinance providers.
Microfinance providers offer financial services to low-income clients who may not have access to traditional banking.
What role do business angels play in business finance?
Business angels are individual investors who provide capital and mentorship to startups and growing businesses.
Describe venture capital as a source of finance.
Venture capital involves investment from firms or individuals in high-growth potential startups in exchange for equity.
Differentiate between short-term and long-term finance.
Short-term finance is needed for less than one year, while long-term finance is required for over a year.
Explain the importance of the cost of finance.
The cost of finance includes interest rates, costs of selling shares, and opportunity costs, which impact the overall expense of raising funds.
List other considerations when choosing a source of finance.
Control of the business, purpose of the finance (e.g., mortgage), and level of debt.
Describe the impact of the purpose for finance on the choice of source.
The purpose, such as buying a property (mortgage), influences the most suitable type of finance due to specific requirements.
Explain how the level of debt affects financing decisions.
A higher level of debt may increase financial risk and influence the choice of more suitable or less risky funding options.
