Sources Of Finance Flashcards
Describe some factors which may affect source of finance.
How much money is needed.
Lengths of time the money is needed for.
Purpose of finance.
Current performance and cash position of business.
Type of business ownership.
Bank interest rates (determined by Bank of England base rate).
What’s a bank loan?
A lump sum borrowed by the bank and paid back over an agreed period of time and paid with interest. Often secured by asset.
Discuss bank loan.
Advantages:
A fixed payment so easy to budget (certainty).
Able to negotiate term so that payments are affordable.
Disadvantages:
Repay more than borrowed.
Secured by an asset, which could be seines if payments are not paid.
Changes in external factors can cause the loan to be expensive.
What’s a government grant?
A capital gained from the government when a set of criteria are met which doesn’t need to be repaid.
Discuss a government grant.
Advantages:
No interest
No repayments
Disadvantages:
Conditions to meet limited funds.
Takes a long time to arrange.
What’s a mortgage?
A long term loan used to purchase land or property.
Discuss mortgage.
Advantages:
Long term to repay which makes it affordable.
Cheapest method of bank borrowing.
Disadvantages:
Variable rate of interest making payments rise.
Bank can size property if payments are not made.
What’s a debenture?
A long term, high value loan with a fixed rate of interests, only available to plc’s.
Discuss debenture.
Advantage:
Long time to repay which makes it affordable.
Fixed interest rate.
Disadvantages:
Huge lump sum at the end of the year,
What’s a trade credit?
An agreement with the supplier to buy stock and pay for it after an agreed credit period.
Discuss trade credit.
Advantages:
Gives time to sell goods and earn money which is good for cash flow.
Disadvantages:
Risk of bad debt if stock doesn’t sell.
What’s debt factoring?
An agreement with a factoring company to sell unpaid debts.
Discuss debt factoring.
Advantages:
Business gets 80% of debt upfront.
Business doesn’t have to chase customers for payments.
Disadvantages:
Business loses 5% of fee to factoring company which cuts income.
Relationship with customer will suffer.
What’s an overdraft?
An agreement with the bank to overspend the business bank account to an agreed limit.
Discuss overdraft.
Advantages:
Arranged in advance which makes it available immediately.
Avoids making late payments.
Disadvantages:
Expensive methods of bank borrowing ( high interest rate).
Suitable for only short term borrowing.
What’s share capital/share issue?
Selling part ownership in return for some cash investment. Does not need to be repaid but shareholders expect a dividend, to be paid out of profits.
Discuss share issue/share capital.
Advantages:
No repayments, no legal obligation to lay dividend.
Significant potential investment into the business.
Disadvantages:
Giving up part ownership.
Lose control of part profits (dividend)
Long time to arrange.
What’s retained profits?
Profits made from previous year which has not been spent.
Discuss retained profits.
Advantages:
No interest.
No repayments
No loss of ownership
Disadvantages:
Could be risky to invest all of saved funds.
May be limited/ unavailable
What’s a venture capital?
Investment into business by a venture capitalism (firm or individual) for share ownership.
Discuss venture capital
Advantages:
No repayments
Available for high risk ventures
Disadvantages:
Loss of part ownership
Loss of control in decisions.
What’s hire purchase?
An asset is purchase with a deposit, then the balance is paid with interest over an agreed period of time.
Discuss hire purchase.
Advantages:
Avoids lump sum outlay.
Time to lay for it in instalments.
Disadvantages:
Interest added so overall cost is higher.
Assets can be seines if payments are not made.
What’s sales of assets?
A lump sum gained when the business sells an asset or groups of assets that the business no longer requires.
