short and medium term sources of finance Flashcards
(29 cards)
What are retained earnings?
Profits kept in the business instead of paid out as dividends; An internal source of finance
What are bank loans?
A fixed amount of money borrowed from a bank; Repaid with interest over a set period
What is a bank overdraft?
A short-term facility allowing a business to withdraw more money than it has in its bank account; An external source of finance
What type of finance is retained earnings?
Internal source of finance used for medium to long term investment
What type of finance is a bank loan?
External source of finance, usually medium to long term borrowing
What type of finance is a bank overdraft?
External source of short-term finance for managing day-to-day cash flow
What are advantages of retained earnings?
No interest or fees to pay; No loss of control or ownership dilution
What are disadvantages of retained earnings?
May limit business growth if profits are insufficient; Shareholders may prefer dividends over retained profits
What are advantages of bank loans?
Predictable repayments aid financial planning; Allows large sums to be borrowed for investment
What are disadvantages of bank loans?
Interest payments increase cost; Regular repayments may strain cash flow
What are advantages of bank overdrafts?
Flexible and quick access to cash; Only pay interest on the amount used
What are disadvantages of bank overdrafts?
High interest rates compared to other borrowing; Can be withdrawn by the bank at short notice
What is trade credit?
Buying now, paying later; A short-term supplier finance
What are advantages of trade credit?
Improves cash flow; No interest if paid on time
What are disadvantages of trade credit?
Late payment can hurt credit rating+ interest; May have discounts lost if not paid upfront
What are the two types of factoring?
1) Sales ledger factoring= factor manages entire process
2) Invoice discounting= factor buys debts but not responsible for collection
What are advantages of factoring?
Improves cash flow quickly; Outsources debt collection
What are disadvantages of factoring?
Can be costly; Risk of bad reputation with customers
What is hire purchase?
Buying with instalments; Ownership after final payment
What are advantages of hire purchase?
Spreads cost over time; Ownership at end of term
What are disadvantages of hire purchase?
Interest adds to cost; Asset tied until fully paid
What are the two types of leasing?
Operating lease (short term, cancelable); Finance lease (long term, non-cancelable)
What are advantages of operating leases?
No ownership risk; Flexibility to upgrade equipment
What are disadvantages of operating leases?
No ownership at end; Can be more expensive long term
