3.5.3 Flashcards
(12 cards)
What factors would a manager need to consider when deciding how to finance an activity or purchase? List 2
- Interest
- Size of the activity/investment
- Business ownership
- Time
- Financial position
What is an internal source of finance? Give an example of a short term and long term source of finance.
= Funds that already exist within the business
ST = Retained profits
LT = Sale of assets
What is an external source of finance? Give an example of a short term and long term source of finance.
= Funds injected from outside the business
ST = Trade creditors, overdrafts, debt factoring
LT = Loans, mortgages, debentures, venture and share capital
What is retained profit? List 2 pros and cons of using this source of finance.
= The portion of net earnings not paid out as a dividend but reinvested in the business or kept as reserves
+ No interest or fees
+ Quick access
- Limited availability
- Shareholder dissatisfaction
What is debt factoring? List 2 pros and cons of using this source of finance.
= A process that involves selling accounts receivable to a third party at a discount in exchange for immediate cash
+ Improves cash flow
+ Can focus on core activities
- High cost
- Customer relations may be damaged
What is an overdraft? List 2 pros and cons of using this source of finance.
= A facility allowing a business to withdraw more money than is available in its account up to an agreed limit
+ Flexibiliry
+ No collateral/security
- Higher interest rates
- Recall risk
What are loans? List 2 pros and cons of using this source of finance.
= Sums of money borrowed from banks or financial institutions, to be repaid with interest over a set period
+ Large sums available
+ Fixed repayment schedule
- Interest and fees
- Collateral/security requirement
What is share capital? List 2 pros and cons of using this source of finance.
= Money raised by selling shares in a company
+ No repayment obligation
+ Enhanced credibility
- Dilution of control
- Public disclosure
What is venture capital? List 2 pros and cons of using this source of finance.
= Funding provided by investors to startups and small businesses with high growth potential
+ Expert advice
+ High-risk funding
- Loss of control
- High returns expected
What is trade credit? List 2 pros and cons of using this source of finance.
= An agreement where a supier allows a business to purchase goods and pay later
+ Improves cash flow
+ No interest
- Short term
- Risk of default
What is crowdfunding? List 2 pros and cons of using this source of finance.
= Involves raising small amounts of money from a large number of people, typically via online platforms
+ Marketing and feedback
+ Alternative funding
- Resource intensive
- Uncertain success
What are the 5 influences on sources of finance?
- Legal structure
- Cost
- Flexibility
- Control
- Why the finance is needed
