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Business > Business Finance > Flashcards

Business Finance Flashcards

1
Q

Define Owner’s Capital

A

Money invested by the owner of a business that often comes from their personal savings or cash that comes from a change in circumstance (e.g. inheritance)

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2
Q

Give 2 advantages of Owner’s Capital

A
  • Can give entrepreneur more control as it does not rely on banks
  • No interest is paid
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3
Q

Give 1 disadvantage of Owner’s Capital

A
  • Can be a limited amount of money and not enough to meet the needs of a start up business
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4
Q

Define Retained Profit

A

Profit that is generated within the business and reinvested in order to fund expansion

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5
Q

Give 1 advantage of Retained Profit

A
  • No interest is paid
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6
Q

Give 1 disadvantage of Retained Profit

A
  • Profits may be limited and therefore insufficient
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7
Q

Define Sale of Assets

A

When established businesses are able to sell off assets that are no longer required (e.g. buildings or machinery)

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8
Q

Give 2 advantages of Sale of Assets

A
  • The business can gain large sums of money
  • No interest is paid
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9
Q

Give 1 disadvantage of Sale of Assets

A
  • Smaller businesses are unlikely to have unwanted assets
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10
Q

Name 3 internal sources of finance

A

-Owner’s Capital
- Retained Profit
- Sale of Assets

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11
Q

Define Overdraft

A

When money is withdrawn from a bank account and the available balance goes below zero

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12
Q

Give 2 advantages of Overdraft

A
  • Good to cover short term cash flow problems
  • Flexible source of finance as businesses will only use it when needed (e.g. emergencies)
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13
Q

Give 2 disadvantages of Overdraft

A
  • Can become expensive due to high interest rates
  • Bank can demand full repayments within a short period of time
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14
Q

Define Trade Credit

A

When a business is able to obtain raw materials and stock but pays for them at a later date

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15
Q

Give 1 advantage of Trade Credit

A
  • allows a business to make a payment once it has had the opportunity to convert the raw materials into products, and receive payment
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16
Q

Give 1 disadvantage of Trade Credit

A
  • It has to be paid back so some of the profit is lost
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17
Q

Define Debt Factoring

A

Where a business sells their invoices to a factor such as a bank

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18
Q

Give 1 advantage of Debt Factoring

A
  • Improves cash flow as they gain access to some cash right away
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19
Q

Give 1 disadvantage of Debt Factoring

A
  • The business does not receive the full value of the invoice
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20
Q

Name 3 short- term external sources of finance

A
  • Overdraft
  • Trade Credit
  • Debt Factoring
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21
Q

Define Bank Loans

A

Money lent to a business that is paid off with interest over an agreed period of time

22
Q

Give 2 advantages of Bank Loans

A
  • The rate of interest is fixed so the business knows the cost of borrowing in advance
  • Makes it easier to plan ahead and manage cash flow
23
Q

Give 1 disadvantage of Bank Loans

A
  • There is an increased risk to personal assets because businesses must offer security in the form of property
24
Q

Define Share Capital

A

The money raised by a business through the sale of shares in the business

25
Q

Give 2 advantages of Share Capital

A
  • Higher levels of financial flexibility
  • Lower risk of bankruptcy
26
Q

Give 1 disadvantage of Share Capital

A
  • Slows down decision making process
27
Q

Define Venture Capital

A

Money invested by an individual or group that is willing to take the risk of funding a new business in exchange for an agreed share of the profits

28
Q

Give 1 advantage of Venture Capital

A
  • The entrepreneur doesn’t have to pay the full amount back
29
Q

Give 2 disadvantages of Venture Capital

A
  • Venture capitalists want a share of the profit
  • Venture capitalists want input into how the business is run
30
Q

Define Business Angels

A

Professional investors that invest in businesses with high growth prospects

31
Q

Give 1 advantage of Business Angels

A
  • Skills, experience, and contacts are all available to the business
32
Q

Give 1 disadvantage of Business Angels

A
  • Entrepreneur has a loss of control over their business
33
Q

Name 4 long- term external sources of finance

A
  • Bank loans
  • Share Capital
  • Venture Capital
  • Business Angels
34
Q

Define Hire Purchase

A

When a business agrees a contract to acquire an asset by paying an initial instalment and repays the price of that asset plus interest over a period of time

35
Q

Give 2 advantages of Hire Purchase

A
  • Allows a business to spread the cost rather than use large sums of money by paying upfront
  • Flexible as terms can be between 1 and 5 years
36
Q

Give 1 disadvantage of Hire Purchase

A
  • Once the final payment is made the business would own the asset
37
Q

Define Leasing

A

Similar to renting a piece of equipment or machinery. The business pays a regular amount over a period of time but the item belongs to the leasing company

38
Q

Give 3 advantages of Leasing

A
  • Cheaper in the short term than buying equipment outright
  • Equipment can be regularly updated or replaced
  • Cash flow management is easier due to regular payments
39
Q

Give 1 disadvantage of Leasing

A
  • More expensive long term because the leasing company charges fees
40
Q

Name 2 medium- term external sources of finance

A
  • Hire Purchase
  • Leasing
41
Q

Define Commercial Mortgage

A

A sum of money that is borrowed from the bank that is secured against a business property and payed back in instalments over a long period of time

42
Q

Give 2 advantages o0f Commercial Mortgage

A
  • Mortgage is given for a long period of time
  • Large amounts of finance can be raised quickly
43
Q

Give 2 disadvantages of Commercial Mortgage

A
  • Interest is charged on the loan
  • Property can be lost to the Mortgage lender if repayments are missed
44
Q

Define Government Grant

A

A fixed amount of money awarded by the government or charitable organisations

45
Q

Give 1 advantage of a Government Grant

A
  • Does not have to be paid back
46
Q

Give 2 disadvantages of a Government Grant

A
  • Business needs to meet certain criteria
  • It is time consuming to apply for grants and complete all the paperwork
47
Q

Define Sales and Leaseback

A

When a business sells a major asset then leases the same asset back from the new owner in order to raise finance

48
Q

Give 2 advantages of Sale and Leaseback

A
  • No interest is charged
    -Can raise finance quickly
49
Q

Give 1 disadvantage of Sale and Leaseback

A

-The business will often pay more for the asset in the long run, due to providing a ‘profit’ in the form of interest to the leasing company

50
Q

Name 3 long and medium-term external sources of finance

A
  • Commercial Mortgage
  • Government Grant
  • Sale and Leaseback

Business (3 decks)

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