3.5.3 Financial Management Flashcards
(27 cards)
What are internal sources of finance?
Finance generated from within the business, such as retained profits and sale of assets.
What are external sources of finance?
Finance obtained from outside the business, such as bank loans, overdrafts, share capital, and venture capital.
What is retained profit?
Profit that is kept in the business rather than distributed to shareholders. It’s reinvested for growth or operations.
Advantages of retained profit?
• No repayment required
• No interest costs
• Quick access
• No loss of control
Disadvantages of retained profit?
• Opportunity cost (dividends not paid)
• May be limited
• Can cause shareholder dissatisfaction
What is share capital?
Finance raised by issuing shares in return for equity. Common in limited companies.
Advantages of share capital?
• No repayment or interest
• Can raise large amounts
• Spreads risk among shareholders
Disadvantages of share capital?
• Loss of ownership/control
• Shareholders expect dividends
• More regulation (especially public companies)
What is a bank loan?
A fixed amount of money borrowed from a bank, repaid with interest over a specified period.
Advantages of bank loans?
• Fixed interest and repayment schedule
• Suitable for long-term needs
• Retain full ownership
Disadvantages of bank loans?
• Interest increases cost
• Requires collateral
• Can be hard to obtain for new/small businesses
What is an overdraft?
A short-term borrowing facility allowing a business to spend more than it has in its bank account.
Advantages of overdrafts?
• Flexible – only use when needed
• Quick to arrange
• Good for short-term cash shortfalls
Disadvantages of overdrafts?
• High interest rates
• Can be withdrawn at short notice
• Not suitable for long-term use
What is debt factoring?
Selling accounts receivable (unpaid invoices) to a third party (factor) at a discount for immediate cash.
Advantages of debt factoring?
• Immediate cash inflow
• Reduces risk of bad debts
• Improves cash flow
Disadvantages of debt factoring?
• Loss of some revenue (fees)
• May affect customer relations
• Not suitable for all businesses
What is venture capital?
Investment from individuals or firms in high-risk, high-potential businesses in exchange for equity.
Advantages of venture capital?
• Provides expertise and guidance
• Suitable for risky ventures
• No repayment required
Disadvantages of venture capital?
• Loss of some control
• Investors may influence decisions
• Profits shared with investors
What is crowdfunding?
Raising small amounts of money from a large number of people, usually via the internet.
Advantages of crowdfunding?
• Quick access to finance
• Builds community support and marketing
• No interest to repay (equity-based or donation-based)
Disadvantages of crowdfunding?
• Uncertain funding success
• Requires strong marketing
• Loss of equity or obligations to donors
Which sources of finance are suitable for short-term needs?
• Overdrafts
• Debt factoring
• Short-term loans
• Some crowdfunding campaigns
