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Business Studies (Final) > 5.3a - Sources of Finance > Flashcards

5.3a - Sources of Finance Flashcards

1
Q

Examples of internal sources of finance:

A
  • Founder finance
  • Retained profits
  • Debt factoring
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2
Q

Examples of external sources of finance:

A
  • Bank loan
  • Bank overdraft
  • Friends and family
  • Venture capitalists
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3
Q

Short term finance definition

A

Finance intended for repayment within 12 months

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4
Q

Long term finance definition

A

Finance intended for repayment after over a year

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5
Q

Rationalisation definition

A

When managers reorganise the business to make it more efficient through selling assets

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6
Q

Advantages of rationalisation:

A

Business does not have to pay interest on finance raised

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7
Q

Disadvantages of rationalisation:

A
  • No longer own asset

- Assets lose value over time so they will not get as much as they paid for them

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8
Q

What does a business need to consider when choosing a source of finance?

A
  • Legal structure
  • Amount required
  • Level of risk
  • Short term or long term
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9
Q

Capital expenditure definition

A

Spending on items that can be used again

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10
Q

Revenue expenditure definition

A

Spending on day to day costs

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11
Q

Capital structure definition

A

The way a business raises capital to purchase assets

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12
Q

Debt factoring definition

A

When a factoring company buys the right to collect money from the credit sales of the business

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13
Q

How does debt factoring work?

A

The factoring company pays the business 80-90% of debts and collects full amount itself

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14
Q

Advantages of debt factoring:

A
  • Improved cash flow in a short time
  • Lower admin costs
  • Reduced risk of bad debts
  • Increased efficiency
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15
Q

Disadvantages of debt factoring:

A
  • Loss of revenue
  • High cost
  • Customer relations problems
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16
Q

Bank overdraft definition

A

A borrowing product in which a bank lets a business owe it money when their balance goes below zero, in return for charging a high rate of interest

17
Q

Advantages of bank overdraft:

A
  • Flexible
  • Interest is only paid on amount of overdraft used
  • Useful for seasonal businesses
  • Security is not usually required
18
Q

Disadvantages of bank overdrafts:

A
  • High interest rate
  • Flexible rates
  • Banks can demand immediate repayment
19
Q

Advantages of retained profit:

A
  • Cheap
  • No security required
  • Management of dividend payments (choice over what to do with it)
20
Q

Disadvantages of retained profit:

A
  • Impact on dividends to shareholders
  • Misuse of funds
  • Opportunity cost
21
Q

Advantages of share capital:

A
  • Can be large
  • Can be long term
  • New shareholders bring expertise
22
Q

Disadvantages of share capital:

A
  • Only available to limited companies
  • Complex to issue
  • Pay dividends
  • Loss of control
  • New shareholders may have different aims
23
Q

Advantages of bank loans:

A
  • Easy for budgeting
  • Lower interest rates
  • Guaranteed money for duration of loan
  • Don’t give up any ownership
24
Q

Disadvantages of bank loans:

A
  • Limitations on amount available
  • Inflexibility
  • Potential expense
  • Good credit score needed
  • Fee if paid back early
25
Q

Venture capitalists definition

A

High net worth individuals who invest in businesses

26
Q

What is the investment range for venture capitalists?

A

£10,000 - £750,000

27
Q

Advantages of venture capital:

A
  • Suited to high risk companies
  • Interest and dividends can be delayed sometimes
  • Source of advice
28
Q

Disadvantage of venture capital:

A
  • Some ownership is given up

- Excessive influence

29
Q

What are alternative sources of finance?

A
  • Sale and leaseback
  • Debentures
  • Mortgages
  • Sale of assets
30
Q

Debenture definition

A

A long-term loan made to a business at an agreed fixed percentage rate of interest and repayable on stated date

31
Q

How long do debentures last for?

A

25 years

Business Studies (Final) (143 decks)

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