Business 3.2 Flashcards
What are the internal sources of finance
Personal Funds
Retained Profit
Sale of Assets
Personal funds adv and dis
Advantages
- No need to pay interest or dividends
- Quick access to cash
Disadvantages
- Limited funds available
- May not be sufficient for larger investments
Retained Profit advantages and disadvantages
Advantages:
- Complete control over the funds
- No need to pay interest or dividends
Disadvantages:
- Reduces the amount of cash available for other purposes
- May not be sufficient for larger investments
Sale of Assets adv and dis
Advantages:
- Provides immediate cash flow
- No need to pay interest or dividends
Disadvantages:
- May not generate enough funds for larger investments
- Loss of asset and potential future benefits
What are all external sources of finance
Equity Financing (Share Capital)
Loan Financing (Loan Capital)
Overdrafts
Trade Credit
Crowdfunding
Leasing
Microfinance Providers
Business Angels
Share capital
Advantages
- No requirement for repayment
- Potential for greater access to additional funding in the future
Disadvantages
- Dilution of ownership control
- Sharing of profits with shareholders
Loan Financing (Loan Capital) adv and dis
Advantages
1. Fixed interest rates
- Established repayment schedule makes it more accessible due to paying small amounts each month
3.Large businesses are often able to negotiate a lower rate of interest on their loans (financial economies of scale).
4.Loan capital is suitable if the owners need to raise finance but do not want to dilute their ownership or potentially lose control through issuing shares.
Disadvantages
- Need for collateral or personal guarantees
- Restrictive covenants and conditions
3.Interest is charged on the amount of borrowed funds
Overdrafts advantages and disadvantages
Advantages of overdrafts
Overdrafts are quite easy to obtain, so are an important source of external finance for small businesses in particular.
Overdrafts provide businesses with emergency funds to finance their operations, such as making payment to suppliers or paying wages to staff, during times when liquidity is a problem.
It provides great flexibility for businesses as overdrafts are only used as and when needed.
Disadvantages of overdrafts:
Interest is charged on the amount overdrawn, usually at rates higher than those charged for ordinary bank loans.
Banks usually only lend a small amount of money, in order to keep a business operation; it is not a suitable source of finance for purchasing fixed assets, for example.
Banks can ask for overdrafts to be repaid at very short notice.
It is essentially a high cost, short-term loan for businesses.
Trade Credit advantages and disadvantages
Advantages
- Interest-free financing
- No collateral or personal guarantees required
Disadvantages
- Limited amounts of credit available
- Potential for strained supplier relationships
Crowdfunding advantages and disadvantages
Advantages:
- Potential for raising large amounts of capital
- Opportunity to connect with customers and supporters
3.No loss of ownership
4.No need to be payed back
Disadvantages
- Limited control over the fundraising process
- Need to meet fundraising goals to access funds
Leasing advantages and disadvantages
Advantages:
1. Lower initial costs than purchasing
- Flexibility to upgrade or switch equipment as needed
- The lessor takes responsibility for the maintenance of the capital equipment and other leased property. This helps to cut the operating costs of the lessee
Disadvantages
- Higher long-term costs due to interest and fees accumulated
- No ownership of the asset
Microfinance Providers advantages and disadvantages
Microfinance can help many people to get out of poverty by making them become financially independent.
Around half of the world’s people live on less than $2 a day, (with the vast majority of these living in low-income countries or highly indebted poor countries) so microfinance can help to provide poverty relief.
They help to empower entrepreneurs of small businesses, especially women and the underprivileged working and living in low-income countries.
Microfinance can create benefits for the wider community, such as improved healthcare, education and employment opportunities.
Microfinance providers act in a socially responsible way by helping the poorest and most vulnerable adults in society.
Disadvantages:
Microfinance only provides finance on a small scale, so is unlikely to be sufficient to make a real difference to society as a whole.
Microfinance loans incur interest charges, so can be rather expensive for small business owners who find it difficult to earn enough revenue to keep up with their loan repayments.
Microfinance increases the debts of entrepreneurs who may subsequently struggle in their business venture.
Due to relatively low profitability, microfinance providers may struggle to attract and/or retain employees and managers, given that their remuneration packages are unlikely to be matched by larger for-profit financial companies such as commercial banks and insurance companies.
Business Angels advantages and disadvantages
Advantages:
Business angels provide an essential source of finance for start-ups and small businesses that are unable to secure finance from conventional providers of finance, such as commercial banks and other financial institutions.
The business can benefit from the expertise and experiences of the business angels, who are likely to provide their input in order to secure a significant return on their investment (ROI).
It is particularly useful for small businesses and inexperienced entrepreneurs who are unable to raise sufficient finance on their own, such as those which are unable to secure loan capital or those that are not permitted to sell shares on a public stock exchange.
Disadvantages:
For the business angels, such business ventures are extremely high risk, especially as they risk losing their personal money. Hence, the amount of finance available is often not easily available for start-ups and small businesses.
This also means that there are no guarantees than angel investors will earn a satisfactory ROI, despite the high potential returns.
Such finance is difficult to come by, not only due to the risks involved but also due to the large number of entrepreneurs competing for such funds. You only have to watch an episode of Dragon’s Den or Shark Tank to realise this.
The use of business angels will dilute the firm’s control and ownership as the angel investors will want a share and say in the organization.
