Sources Of Finance Flashcards
Retained Profits
Internal
Owner saves the businesses profits and then the money is put back into the business
Advantages:
no need to pay interest on the money
Disadvantages:
the business may not have enough retained profits to merits needs
Shareholders may become unhappy if this means lower dividend payments
Owners Funds
Internal
Money put into the business by the owner
Advantages: no need to pay interest on the money
Disadvantages: owner may not have enough funds to meet the needs if the business
Selling assets
Internal
Items owned by the business are sold and the money made is used to finance the business
Advantages:
The business is using the money it already has so no need to take out loans or pay any interest
Disadvantages:
The business may sell something they may later need
The business has to have something worth selling for this to be an option
Over draft
External
The bank allows the business to take out more money from their bank account than they actually have in it
Advantages:
Very quick to arrange
A good short term solution to a cash flow problem
Disadvantages:
Only suitable for smaller amount and has to be repaid within a short amount of time
Interest/charges are paid
Trade credit
External
Items are bought from suppliers on a but now pay later basis
Advantages:
Gives the business more cash to use in the immediate future
Disadvantages:
San ku be used to buy certain goods
Bulls usually have to be settled within 30, 60 or 90 days
Debt factoring
External
The company sells a debt it is owed to a debt factoring company who pay the business a smaller sum than they were owed
Advantages:
Allows the business to get money for debts that might otherwise never have been paid
Saves the business time chasing customers for money owed
Debentures
External
Long term borrowing similar to selling shares but with the promise of repaying the amount lent at a fix period of time, usually for a set amount of interest
Advantages:
Allows the business to know exactly how much interest will be paid and when the debt has to be paid back
Disadvantages:
no longer a popular method of finance for businesses
Leasing
External
Used to help obtain new equipment e.g cars the business rents the item from it’s owner
Advantages:
cost of the asset is spread over it’s life
No need to find a lump sum of money to purchase it
Disadvantages
May be more expensive than buying the asset as the owner will want profit
Bank loan
External
An amount of money is borrowed from the bank the repaid with interest over a set period of time
Advantages:
Easy and quick to set up
Large amount if money can be borrowed
Disadvantages:
Must pay interest
If repayments cannot be kept up the business risks getting a poor credit or being made bankrupt
Issuing shares
external
A share in the business is sold to an individual or another business
Advantages:
no need to repay the money invested
Cheaper than a loan
Can raise large sums of money
Disadvantages:
need to pay the shareholders a share of future profits
Original Owners may lose control over business
Risky for shareholder because the investment may be lost if the business fails
Mortgage
External
Long term loan provided by a bank to buy a property
Advantages:
Only method specific for buying property
Structured payments over a log term
Disadvantages:
large sums if interest charged
Can take a long time to repay debt
Government grants
External
Money given to the business by the government, usually to help finance new project especially those that create new jobs
Advantages:
No need to repay the grant
Disadvantages:
May be a restriction on what the funds can be used for
Hire purchase
External
Item is bought on fiancé and repayments are made each month until the final payment when the item becomes property if the business
Advantages:
Flexible method, can hand back the item if no longer required and payment will stop
Disadvantages:
Higher interest charges
Item doesn’t belong to the business until after the term
Venture capital
External
Venture capitalists invest in a small risky business e.g new business steer ups
Advantages:
Can raise money from then even when banks have refused a loan
Disadvantages:
Risky for adventure capitalist
The VC may want control over the business
Advantages of Owners funds
No need to pay interest
Advantages of Retained profits
No need to pay interest
