5.3 Sources Of Finance Flashcards
(29 cards)
Name 2 internal sources of finance.
Retained profit.
Selling assets.
Define retained profit.
The portion of profit kept by the company for future use.
Is retained profit best for short or long term use?
Both.
What are the advantages of a business using retained profit?
Instant access.
Cheap as no interest is paid - therefore lowers costs.
What are the disadvantages of using retained profit?
Opportunity cost.
Shareholders may be unhappy - as takes away from potential dividends.
Limited amount - may need to use other sources as well.
Define selling assets as a source of finance.
Selling or transferring assets rather than shares e.g. vans, machinery.
Is selling asssets a short or long term source of finance?
Long term.
What are the advantages of selling assets?
Can raise money from idle assets.
Instant cash injection.
No interest/debt.
What are the disadvantages of selling assets.
May not receive market value for assets.
May need assets again in future.
Reduced capacity - may struggle to cope with spikes in demand.
Define overdraft.
When the bank covers a transaction for which the account holder has insufficient funds for.
Name 3 external sources of finance.
Bank loan.
Overdraft.
Debt factoring.
What are the advantages of overdraft?
Quick access.
Allows for emergency purchases.
What are the disadvantages of overdraft?
Very high interest rates.
Short term solution - bank can demand money back at any time.
What is debt factoring?
A business sells their debtors to a third party and then receive an instant cash injection with 80/90% of the debt.
The debt holder then pays the third party the full debt back at a later date.
What is a bank loan?
A sum of money borrowed from the bank.
What are the advantages of a bank loan?
Can get a significant amount of money.
What is a disadvantage of a bank loan?
Have to pay interest - costing the business more money.
What are internal sources of finance?
Money that is raised within a business.
Advantage of debt factoring.
Instant cash injection - improves shorty term cash flow.
Disadvantages of debt factoring.
Loses out on some money owed - business taxes a fee.
Third party may be forceful in collection to ensure they get all debts - may damage relationship with business.
What is share capital?
Money raised by selling shares.
What is an advantage of share capital?
Money doesn’t need to be repaid.
Shareholders bring in additional knowledge and expertise.
Two disadvantages of share capital.
Losing control of a portion of the business.
Have to pay dividends.
What is venture capital?
A type of finance offered by venture capitalists to businesses thought to be high risk, high reward in exchange for a share of the business e.g. Dragons Den.
