Sources of Finance Flashcards

1
Q

What is sources of finance?

A

where money comes from to fund the business

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2
Q

Why is finance needed for stating up?

A
  • buing stock / raw materials
  • capital equipment / furniture
  • marketing / advertising
  • vechiles
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3
Q

Why is finance needed for growing the business?

A
  • more marketing
  • buying other businesses
  • partner with other companies
  • increase stock
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4
Q

What is long term finance?

A
  • finances the whole business over many years
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5
Q

Examples of long term finance?

A
  • share capital
  • retained profits
  • venture capital
  • mortgages
  • long-term bank loans
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6
Q

What is medium term finance?

A

finances major projects or assets with a long life

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7
Q

Examples of medium term finance?

A

bank loans
leasing
hire purchase
government grants

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8
Q

What is short term financing?

A

finances day to day trading of the business

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9
Q

Examples of short term financing?

A
  • bank overdraft
  • trade creditors
  • short-term bank loans
  • factoring
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10
Q

What are the 4 factors influencing the choice and amount of finance required?

A
  • what is the finance required for?
  • the cost of the finance
  • flexibility of the finance
  • the business organisational structure
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11
Q

What are the main internal sources of finance for a start up business?

A
  • founder finance

- friends and family

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12
Q

What are the main sorces of external finance for a start up business?

A
  • business angles
  • loans and grants
  • crowdfunding
  • bank loan
  • bank overdraft
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13
Q

What is founder finance?

A

varies personal sources of the entrepeneur

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14
Q

Give examples of founder finance?

A
  • cash and investments
  • redundancy payments
  • inheritances
  • personal credit cards
  • re-mortgaging
  • putting free time into the business
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15
Q

What are some benifits of personal sources of finance?

A
  • no interest (cheaper)
  • not paying anyone back
  • less stressful
  • less delay
  • more founder puts in, more others will invest
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16
Q

What are some internal sources for established businesses?

A
  • retained profits
  • working capital
  • asset disposal
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17
Q

What are some external sources for established businesses?

A
  • share issues
  • bank loans and overdrafts
  • peer to peer lending
  • debentures
  • venture capital
  • supplier finance
  • debt factoring
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18
Q

Why can start-up businesses not use retained profits?

A

new businesses wont have any retained profits

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19
Q

What are benefits of retained profits?

A
  • cheap
  • very flexible
  • shareholders control the proportion retained
  • dont dilute ownership of company
20
Q

What are disadvantages of retained profits?

A
  • danger of hoarding cash
  • shareholders may prefer dividends if the business is not achieving sufficiently high returns on investment
  • high profits and cash flows would suggest the business could afford debt
21
Q

What is working capital?

A

the capital of a business which is used in every-day trading

22
Q

What is asset disposal?

A

-selling assets for money

23
Q

key parts to asset disposal?

A
  • one of boost to finance
  • not all businesses have them
  • (land, surplus equipment)
24
Q

What are share issues?

A

giving shares of your company for money

25
Advantages of share issues?
- raise substantial funds - broader base of share holders - equity rather then debt means low risk
26
Disadvanategs of share issues?
- can be costly and time consuming | - existing shareholders' holdings may be diluted
27
What are bank loans?
money given by the bank but they expect interest
28
Key things about bank loans?
- medium or long term - loan over fixed period - rate of interest either fixed or varied - generally lower interest rate then overdraft - not much flexibility
29
What is a bank overdraft?
bank lets business owe it money when balance goes below 0 in return for high interest - flexible - long term - great for helping businesses through seasonal fluctuations
30
Bank over draft advanatges?
- relatively easy to arrange - felxible only pay back interest on amount borrowed - not secured on assets of business
31
Disadvanatges of bank overdraft?
- withdrawn at short notice - interest charge varies with changes in interest rate - higher interest then bank loan
32
Advantges of bank loan?
- greater certainty of funding - lower interest then overdraft - appropriate method of financing fixed assets
33
Disadvanatges of bank loan?
- requires security money - interest paid on full amount outstanding - harder to arrange
34
What is debt factoring?
if people owe you money you sell the debt to a third party in return for a fee, typically 10-20% of debt value
35
Advantages of debt factoring?
- solves cash flow problems - use money to continue to trade - quick - reduces admin
36
Disadvantages of debt factoring?
- loss of revenue | - customer reputation worsening
37
What is a debenture?
form of bond or long term loan issued by the company, usually with fixed interest rate
38
Main info on debentures?
- long term (10-20 years) - issued by company - fixed rate of interst - can be traded
39
What is venture capital?
specialist investors in private companies for a large share
40
Main criteria of venture capital?
- manage investment funds designed to achive high rates of returns - focus on larger investments (£1 mil+) - seek large shares of share capital and representation on the board - look to sell investment in the medium term (5-7 yrs)
41
Advantages of venture capital?
- can raise substantial amounts - business benefits from specialist investor support - brings better dicipline to management and startergy
42
Disadvantages of venture capital?
- venture capitalist requires a high rate of return - investmnet often supported by a high-level of bank debt in business - not a long term investment (sell within 5-7 years) - loss of control
43
What is supplier finance?
delaying payment of bills, suppliers provide goods and services in advance of payment = trade creditors as business expands the amount owed to suppliers at any one time also grows
44
What is peer to peer mentoring?
way for businesses to raise loan finances without using banking. involves raising a loan from a group of individuals or institutions and is a very flexible source of borrowing, minimum loan of 5000 - 50 000 and from 6 months to a year - unsecured, - connects businesses looking for finance with individuals willing to invest or loan - managed by online intermediaries
45
What is crowd funding?
- type of peer to peer funding a business or entrepeneur can attract a crowd of investors - each of whom take a small stake by contributing towards an online fundraising target