Section D - Select and evaluate different sources of business finance Flashcards Preview

Business - Unit 3 (Text Book) > Section D - Select and evaluate different sources of business finance > Flashcards

Flashcards in Section D - Select and evaluate different sources of business finance Deck (40):
1

What are the types of internal sources of finance?

1) Retained profit
2) Net current assets
3) Sale of assets

2

What is retained profits?

Profits kept in the business to fund future expenditure.

3

What is net current assets?

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

4

What is sale of assets?

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

5

What are the advantages of retained profit?

No interest charges
Available immediately
Only available up to the amount already accumulated by the business and therefore avoids debt
No loss of ownership (control)

6

What are the disadvantages of retained profit?

Amount available may be limited
Reduces payments to shareholders which may cause dissatisfaction
Once used it is not available for alternative purposes

7

What are the advantages of net current assets?

Encourages the business to manage cash flow effectively

8

What are the disadvantages of net current assets?

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

9

What are the advantages of sale of assets?

No interest charges
Reduces capital tied up in assets, releasing it for other purposes.
Can mean disposing on an asset no longer of use to the business.

10

What are the disadvantages of sale of assets?

It is likely that the amount received is not a true reflection of the value of the asset.
Can increase costs in the longer run if an asset needs to be leased back.

11

What is external sources of finance?

Finance made available from outside the business.

12

Give some examples of external sources of finance?

1) Owner's capital
2) Loans
3) Crows-funding
4) Mortgages
5) Venture capital
6) Debt factoring
7) Hire purchase
8) Leasing
9) Trade credit
10) Grants
11) Donations
12) Peer-to-peer lending
13) Invoice discounting.

13

What is crowd-funding?

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.

14

What is debt factoring?

This involves the selling on of a business's debts to a third party in order to receive the cash quickly.

15

What are the advantages of owners capital?

No interest payments or need to repay
High level of commitment from the owner

16

What are the disadvantages of owners capital?

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

17

What are the advantages of loans?

Regular pre-agreed repayments make planning and budgeting relatively easy
Ownership or control is not lost

18

What are the disadvantages of loans?

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

19

What are the advantages of crowd-funding?

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

20

What are the disadvantages of crowd-funding?

Partial loss of ownership
No guarantee that the crowd fund will attract sufficient investment to meet the proposal

21

What are the advantages of mortgages?

Large amounts of nance can be raised and repaid over a prolonged period of time
Ownership or control is not lost

22

What are the disadvantages of mortgages?

Interest is charged on the amount borrowed Interest rates can uctuate
Often secured against an asset which can be seized if repayments are missed
Interest has to be paid regardless of whether a pro t is being made
Not suitable for small amounts or as a short-term source of nance

23

What are the advantages of Venture capital?

Finance is provided by a business professional who will often offer advice and mentoring alongside the investment
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

24

What are the disadvantages of Venture capital?

Partial loss of ownership and control
Conflict can arise between the entrepreneur and
venture capitalist regarding the direction and day-to-day running of the business

25

What are the advantages of debt factoring?

Speeds up the ow of cash into the business from debts
The factor company takes on the risk of bad debt

26

What are the disadvantages of debt factoring?

Only receive a percentage of the amount owed, therefore reducing pro ts
Can give the wrong impression or alienate customers

27

What are the advantages of hire purchase?

Avoids the need to pay a lump sum for the use of an asset
Regular instalments make planning and budgeting easier
Spreads the cost of an asset over its useful life

28

What are the disadvantages of hire purchase?

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

29

What are the advantages of leasing?

Responsibility for maintaining and repairing the asset stays with the supplier
Spreads the cost of an asset over its life to avoid paying a lump sum up front

30

What are the disadvantages of leasing?

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

31

What are the advantages of trade credit?

Delays the need to pay for goods and services purchased, therefore aiding cash flow
No loss of ownership or control

32

What are the disadvantages of trade credit?

Potential loss of discounts offered for cash payments Only suitable as a short-term source of finance

33

What are the advantages of grants?

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

34

What are the disadvantages of grants?

Often require a lengthy application process
Might only be awarded if certain conditions are met affecting the way the business operates on a day-to-day basis

35

What are the advantages of donations?

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

36

What are the disadvantages of donations?

Likely to be small amounts only
Unpredictable

37

What are the advantages of peer to peer lending?

Interest rates can be lowered than lending from more traditional financial institutions.
Fixed rate of interest can be agreed making it easier to plan and budget.

38

What are the disadvantages of peer to peer lending?

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

39

What are the advantages of invoice discounting?

No need to repay and no interest charges
No loss of ownership or control
Reduces costs to the business so increases profit

40

What are the disadvantages of invoice discounting?

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