sources of finance Flashcards
(15 cards)
what are retained profits, a/d of using them as a source of finance
retianed profits are profits that a business has left over after costs are deducted, which can be reinvested to the business as a source of finance
+no interest payments
+immediately avaliable
+ can use them however they choose to
+ act as a liquidity buffer
+ can use for growth
- money is tied up in business, not earning interest
- less money for shareholders- conflict with shareholders, less attrctive to investors in the future
- must be making good levels of profi
what is business capital, a/d of using them as a source of finance
capital avaliable to pay for day to day expenses-
+ same as above
+ low risk
+ improves ST cash flow
- only small level not enough for large projects/ growth -
can hinder growth e.g. R+ D, expansion, marketing - may arise liquidity issues if working capital is being spent elsewhere
- risk of cash flow issues if use excessively - enable to pay day to day expenses
what is sale of assets, a/d of using as a source of finance
+ business can cut down and focus on key operations, prehaps increasing prodictity and cost of running machines that dont generate large amounts of capital
- not appropriate for all businesses aespecaially small businesses who want to be expanding, cannot sell their assets as they are needed in production
what is a bank loan and a/d
when a business borrows money from a bank, ling term for large amounts of money
+ can fund large projects as can take out large amounts and pay back over long term - allowing for growth and expansion
+ money can be immediately available
+ interest payments at same time every month able to plan cash flow
- harder for small businesses to access this king of finance as bank likely to be unwilling to lend if no evidence able to pay back
- have to pay high interest rates
- may requires security to secure loan
what is an overdraft a/d
when businesses spend more money than they have leaving a - balance
+ good for resolving short term liquidity issues
+ immediate money, for emergency requirements
+ only pay back interest when pay back overdraft
-extremely high interest payment, not effective for large amounts of money only useful in the short term
- often arrangement fee
- must be quickly trip when bank demands
what is sale and leaseback a/d
when a business sells their asset e.g. machine, property and leases It back
+ helps gather lots of money in the short term to fund large investment, allowing company to grow
+ tax benefits when leasing, can offset as a operating expense avoiding paying tax as dont own.
- no longer own asset, may end up costing more in LR
what is share capital a/d
when public limited company’s sell their shares on the stock market which can be bought by individuals, and the money can be used to fund investment - LT method of providing funds for growth
+ no interest payments
+ can have a say on how business is run if own a larger share and may provide useful advice
- could end up loosingg control if someone bought a large share of the business
- have to pay shareholders dividends - share of profits
- shareholders want an exit started within few years of investment and expect their investment to be paidd back, business must grow quickly
what is trade capital a/d
this is when business receive the product but dont pay for it until a later date e.g. 30-90 days
+ may be able to sell and create profit before have to pay back
+ ensure dont need to use extra finance to buy good can buy with reinvested profits
- if fail to pay on time could lead to bad relationships with suppliers and this could lead to them stopping supplying to the business
- miss out on discounts that are often offered ioay early meaning cost of goos is higher if credit period is used
what is hire purchase a/d
when businesses pay monthly payments for an asset and by the end of the payments they own the asset
+ able to forecast cash flow as aware money will be leaving and what amount
+ able to have access to using the good even when cannot afford full cost
+ own asset at the end of th payments
-often more expensive then buying upfront , IR high
- dont own until final payment
- items can be taken away if falling behind with payments
- service charge fir instalment
what is leasing a/d
when business hires assets/ machinery, dont actually own the asset
+ able to switch to new machinery easily at a lower cost
+ pay monthly intervals, no need for large sums of money
+ maintenance repairs and bills are met by leasing company
+ for small businesses easier to obtain than loans
- more costly in the LR, more than price of purchasing
- never actually own asset
what is venture capital a/d
often in private limited companies where individuals invest at early stages of business of its seems to be successful, owns a share of business - LT source of capital
+ advice and new ideas bought from venture capitalist
+ no interest or debt
+ large sums attained quickly
- expect to be highly involved with business activities
what is crowd funding a/d
in early development of. product, online advertisement, funding for business without any share of business in return but are given rewards
+easy way to start up business no debt, bank loans
+ quick set up and able to reach potential contributors easily
+ leave feedback about produc so can be improved before launched into market
+ have full control
- no guarantee people will contribute
- competitors could easily steal idea before launched
what is factoring a/d
selling invoices to a third party to get immediate cash , can be in some banks. pays business % of money that customers owe business and once customers payed receive remaining %- fee
+ solves ST liquidity issues as evoke ti receive finance immediately
- must pay a fee
what is a commercial morgage a/d
when a property is secured s/ used as security against a loan e.g. 60/70% value of property
+ reduces IR
+ monthly, helpful with budgeting and cash flow
- failure make repayments, property is repossessed by lender
what is government grant a/d
when the government provides a start up business with some money often in areas where unemployment rates are high
+no repayment or IR
- often only small amount only beneficial for SR
- must meet criteria/ admissions requirements
- not common
