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Personal and Business Finance > Learning Outcome D: Select and evaluate different sources of business finance > Flashcards

Learning Outcome D: Select and evaluate different sources of business finance Flashcards

1
Q

Source of finance

A

Where money comes from

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2
Q

What determines which source of finance is most suitable?

A

What the money is for

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3
Q

True/False: Sources of finance are only long-term

A

False, they can be short-term or long-term

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4
Q

What is meant by a short-term loan?

A

A loan that needs to be paid back in one year

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5
Q

What is meant by a long-term loan?

A

A loan that needs to be paid back in a period of time greater than one year

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6
Q

Internal sources of finance

A

Money available to fund expenditure from within the business

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7
Q

Give 3 examples of internal sources of finance

A

Retained profit, net current assets and sale of assets

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8
Q

Retained profit

A

Profit (sales revenue minus total costs) kept in the business to fund future expenditure

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9
Q

Net current assets

A

Current assets minus current liabilities shows the money available in the business to fund day-to-day expenditure

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10
Q

Sale of assets

A

Selling an item of worth owned by a business in order to achieve an immediate cash injection

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11
Q

Give 2 advantages of retained profits as an internal source of finance

A

Any 2 from no interest charges, available immediately, only available up to the amount already accumulated by the business and therefore avoids debt and no loss of ownership (control

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12
Q

Give 2 disadvantages of retained profits as an internal source of finance

A

Any 2 from amount available may be limited, reduces payments to shareholders which may cause dissatisfaction and once used it is not available for alternative purposes

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13
Q

Give an advantage of net current assets as an internal source of finance

A

Encourages the business to manage cash flow effectively

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14
Q

Give a disadvantage of net current assets as an internal source of finance

A

Any from can put pressure on customers as shorter credit terms are offered and this negatively affects relationships with suppliers if longer credit terms are negotiated and lower stock holdings can affect the firm’s ability to meet customer needs

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15
Q

Give 2 advantages of sale of assets as an internal source of finance

A

Any 2 from no interest charges, reduces capital tied up in assets, releasing it for other purposes and can mean disposing of an asset no longer of use to the business

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16
Q

Give a disadvantage of sale of assets as an internal source of finance

A

Any from it is likely that the amount received is not a true reflection of the value of the asset and can increase costs in the long run if an asset needs to be leased back

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17
Q

External sources of finance

A

Those available from outside the business

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18
Q

Outline owner’s capital as an external source of finance

A

This is money invested in the business from the owner’s personal savings

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19
Q

Outline loans as an external source of finance

A

Loans are money borrowed from a financial institution normally for a set period of time and for a specific purpose. Interest will be payable on the loan

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20
Q

Outline crowd-funding as an external source of finance

A

This involves attracting investment from a large number of speculative investors many of whom may invest relatively small amounts. If cumulatively this matches the required amount then the investments are collected together. Normally makes use of the internet to attract investors

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21
Q

Outline mortgages as an external source of finance

A

These are long-term loans, normally around 25 years, that are secured against a specific asset, for example a building. Interest will be payable on the mortgage

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22
Q

Outline venture capital as an external source of finance

A

This is investment from an experienced entrepreneur in return for a stake (equity) in the business

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23
Q

Outline debt factoring as an external source of finance

A

This involves the selling on of a business’s debts to a third party in order to receive the cash quickly. The factor company pays the business a percentage of the money owed and takes on the responsibility to chase the debts which need to be repaid

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24
Q

Outline hire purchase as an external source of finance

A

This involves paying to use an asset in instalments to spread the cost over its useful life and hence provide a source of finance. The asset will remain the property of the seller until the final instalment has been paid

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25
Q

Outline leasing as an external source of finance

A

This involves paying to use an asset in instalments to spread the cost over its useful life and hence providing a source of finance. Ownership of the asset stays with the supplier throughout the length of the lease agreement.

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26
Q

Outline trade credit as an external source of finance

A

This is a period of time offered by suppliers to allow the customer to purchase a good or service now and pay at a later date, for example 30 days after purchase

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27
Q

Outline grants as an external source of finance

A

This is a lump sum provided to a business by the government or another organisation to be used for a specific purpose. For example, it could be used to provide employment in a deprived area or invest in the research and development of an environmentally friendly alternative to fossil fuels

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28
Q

Outline donations as an external source of finance

A

These are sums of money given voluntarily to charity or social enterprise

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29
Q

Peer-to-peer lending

A

This involves one business person lending money to another business person in return for interest payments

30
Q

Invoice discounting

A

These are reductions offered to customers making a product or service cheaper, often applied as a percentage

31
Q

Give an advantage of owner’s capital as an external source of finance

A

Any from no interest payments or need to repay and high level of commitment from the owner

32
Q

Give a disadvantage of owner’s capital as an external source of finance

A

Any from amount available is likely to be limited and if there is more than one owner this could cause friction if everyone is not able to contribute the same amount

33
Q

Give an advantage of loans as an external source of finance

A

Any from regular pre-agreed repayments make planning and budgeting relatively easy and ownership or control is not lost

34
Q

Give 3 disadvantages of loans as an external source of finance

A

Any 3 from interest is charged on the amount borrowed, interest rates can fluctuate, often secured against an asset which can be seized if repayments are missed and interest has to be paid regardless of whether a profit is being made

35
Q

Give an advantage of crowd-funding as an external source of finance

A

Any from offers the ability to raise finance from a large number of investors and no interest is paid as investors will only be rewarded if the business is successfully sold on at a later date

36
Q

Give a disadvantage of crowd-funding as an external source of finance

A

Any from partial loss of ownership and no guarantee that the crowd fund will attract sufficient investment to meet the proposal

37
Q

Give an advantage of mortgages as an external source of finance

A

Any from large amounts of finance can be raised and repaid over a prolonged period of time and ownership or control is not lost

38
Q

Give 3 disadvantages of mortgages as an external source of finance

A

Any 3 from interest is charged on the amount borrowed, interest rates can fluctuate, often secured against an asset which can be seized if repayments are missed, interest has to be paid regardless of whether a profit is being made and not suitable for small amounts or as a short-term source of finance

39
Q

Give an advantage of venture capital as an external source of finance

A

Any from finance is provided by a business professional who will often offer advice and mentoring alongside the investment and venture capitalists are often risk takers and may see the potential in a high risk investment that other investors including banks may not be willing to invest in

40
Q

Give a disadvantage of venture capital as an external source of finance

A

Any from partial loss of ownership and control and conflict can arise between the entrepreneur and venture capitalist regarding the direction and day-to-day running of the business

41
Q

Give an advantage of debt factoring as an external source of finance

A

Any from speeds up the flow of cash into the business from debts and the factor company takes on the risk of bad debt

42
Q

Give a disadvantage of debt factoring as an external source of finance

A

Any from only receive a percentage of the amount owed, therefore reducing profits and can give the wrong impression or alienate customers

43
Q

Give 2 advantages of hire purchase as an external source of finance

A

Any 2 from avoids the need to pay a lump sum for the use of an asset, regular instalments make planning and budgeting easier and spreads the cost of an asset over its useful life

44
Q

Give a disadvantage of hire purchase as an external source of finance

A

Any from overall amount paid for the use of an asset is likely to be higher than if purchased outright and only really suitable for relatively low cost assets, e.g. vehicles and not premises

45
Q

Give an advantage of leasing as an external source of finance

A

Any from responsibility for maintaining and repairing the asset stays with the supplier and spreads the cost of an asset over its life to avoid paying a lump sum up from

46
Q

Give a disadvantage of leasing as an external source of finance

A

Any from overall amount paid for the use of an asset is likely to be higher than if purchased outright and never actually own the asset and therefore payments are ongoing

47
Q

Give an advantage of trade credit as an external source of finance

A

Any from delays the need to pay for goods and services purchased, therefore aiding cash flow and no loss of ownership or control

48
Q

Give a disadvantage of trade credit as an external source of finance

A

Any from potential loss of discounts offered for cash payments and only suitable as a short-term source of finance

49
Q

Give an advantage of grants as an external source of finance

A

Any from no need to repay and no interest charges and no loss of ownership or control

50
Q

Give a disadvantage of grants as an external source of finance

A

Any from often require a lengthy application process and might only be awarded if certain conditions are met affecting the way the business operates on a day-to-day basis

51
Q

Give an advantage of donations as an external source of finance

A

Any from no need to repay and no interest charges and no loss of ownership or control

52
Q

Give a disadvantage of donations as an external source of finance

A

Any from likely to be small amounts only and unpredictable

53
Q

Give an advantage of peer to peer lending as an external source of finance

A

Any from interest rates can be lower than lending from more traditional financial institutions and fixed rate of interest can be agreed making it easier to plan and budget

54
Q

Give a disadvantage of peer to peer lending as an external source of finance

A

Amounts available may be limited and provided for a short period of time only

55
Q

Give 2 advantages of invoice discounting as an external source of finance

A

Any from no need to repay and no interest charges, no loss of ownership or control and reduces costs to the business so increases profit

56
Q

Give a disadvantage of invoice discounting as an external source of finance

A

Often only available if purchases are paid in cash which affects cash flow

57
Q

Retained profit is an internal/external source of finance

A

internal

58
Q

Net current assets is an internal/external source of finance

A

internal

59
Q

Sale of assets is an internal/external source of finance

A

internal

60
Q

Owner’s capital is an internal/external source of finance

A

external

61
Q

Loans are an internal/external source of finance

A

external

62
Q

Crowd-funding is an internal/external source of finance

A

external

63
Q

Mortgages are an internal/external source of finance

A

external

64
Q

Venture capital is an internal/external source of finance

A

external

65
Q

Debt factoring is an internal/external source of finance

A

external

66
Q

Hire purchase is an internal/external source of finance

A

external

67
Q

Leasing is an internal/external source of finance

A

external

68
Q

Trade credit is an internal/external source of finance

A

external

69
Q

Grants are an internal/external source of finance

A

external

70
Q

Donations are an internal/external source of finance

A

external

71
Q

Peer-to-peer lending is an internal/external source of finance

A

external

72
Q

Invoice discounting is an internal/external source of finance

A

external

Personal and Business Finance (6 decks)

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