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Flashcards in Sources of finance Deck (13):

Whats finance?

Finance refers to sources of money for a business.


Why do firms need finance?

start up a business, eg pay for premises, new equipment and advertising
run the business, eg having enough cash to pay staff wages and suppliers on time
expand the business, eg having funds to pay for a new branch in a different city or country


Whats a problem with new businesses and finance?

New businesses find it difficult to raise finance because they usually have just a few customers and many competitors. Lenders are put off by the risk that the start-up may fail. If that happens, the owners may be unable to repay borrowed money.


Who are creditors?

People you owe money to. A creditor is an individual or business that has lent funds to a business and is owed money.


Whats the difference between sources of short term or long term finance?

Some sources of finance are short term and must be paid back within a year. Other sources of finance are long term and can be paid back over many years.


What are internal sources of finance?

Internal sources of finance are funds found inside the business. For example, profits can be kept back to finance expansion. Alternatively the business can sell assets (items it owns) that are no longer really needed to free up cash.


What are external sources of finance?

External sources of finance are found outside the business, eg from creditors or banks.


Sources of external finance to cover the short term include?

An overdraft facility - where a bank allows a firm to take out more money than it has in its bank account.
Trade credits - where suppliers deliver goods now and are willing to wait for a number of days before payment.
Factoring - where firms sell their invoices to a factor such as a bank. They do this for some cash right away, rather than waiting 28 days to be paid the full amount.


Sources of external finance to cover the long term include?

Owners who invest money in the business. For sole traders and partners this can be their savings. For companies, the funding invested by shareholders is called share capital.
Loans from a bank or from family and friends.
Debentures are loans made to a company.
A mortgage, which is a special type of loan for buying property where monthly payments are spread over a number of years.
Hire purchase or leasing, where monthly payments are made for use of equipment such as a car. Leased equipment is rented and not owned by the firm. Hired equipment is owned by the firm after the final payment.
Grants from charities or the government to help businesses get started, especially in areas of high unemployment.


Who is a debtor?

A debtor is an individual or business who has borrowed funds from a business and so owes it money.


Whats the cost in borrowing funds?

There is a cost in borrowing funds. Money borrowed from creditors is paid back over time, usually with an additional payment of interest. Interest is the cost of borrowing and the reward for lending.


How can creditors ask for security?

Creditors often ask for security before lending funds. This means sole traders and partners may have to offer their own house as a guarantee that monies will be repaid. A company can offer assets, eg offices as collateral.


Why does the type of finance chosen differ?

The type of finance chosen depends on the type of business. Start ups and small firms are considered very high risk and find it difficult to raise external finance. The only source of funds might be the owner's own savings, retained profits and borrowing from friends. Companies can issue extra shares to raise large amounts of capital in a rights issue.