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Business COPY > Theme 2 Topic 7 - Internal & External Finance > Flashcards

Theme 2 Topic 7 - Internal & External Finance Flashcards

1
Q

Define Internal Finance

A

Finance raised from within the business itself

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2
Q

What are the three forms of internal finance?

A

Owner’s capital, Retained profits, Sale of assets

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3
Q

Define Owner’s Capital

A

Money that is provided by the owner of the business from their own savings or personal wealth

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4
Q

What are two advantages of owner’s capital?

A

Cheap source of finance as don’t have to pay interest on it, Allows owners to keep full control

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5
Q

What are two disadvantages of owner’s capital?

A

Not sustainable, Won’t get it back if the business fails

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6
Q

Define Retained Profits

A

Profit that is reinvested into the business rather than distributed to the shareholders or owners

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7
Q

What are two advantages of retained profits?

A

Don’t have to pay interest, More in control

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8
Q

What are two disadvantages of retained profits?

A

Low dividends may dissatisfy the shareholders, Not suitable for a start up business

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9
Q

Define Sale of Assets

A

An asset is any item owned by the business

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10
Q

What are two advantages of sales of assets?

A

The asset may no longer be needed so is a good source of finance, Don’t have to pay interest

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11
Q

What are two disadvantages of sales of assets?

A

No longer able to use it if they need it in the future, May not get enough to cover the costs

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12
Q

Define External Finance

A

Finance raised from sources outside the business

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13
Q

What are the eleven external sources of finance?

A

Overdraft, Loan, Grant, Family and friends, Share capital, Venture capital, Trade credit, Leasing, Crowd funding, Other businesses, Peer-to-peer funding

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14
Q

Define Overdraft

A

An arrangement that allows you to spend more money than you have in your bank account, up to a certain limit

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15
Q

What are two advantages of overdrafts?

A

Extremely flexible, Interest is only paid on the amount of the overdraft being used rather than the maximum level allowed

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16
Q

What are two disadvantages of overdrafts?

A

Higher interest rates than loans, The bank can ask for repayment at any time

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17
Q

Define Bank Loan

A

Agreement to borrow a fixed sum of money over an agreed time period

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18
Q

What are two advantages of loans?

A

Able to borrow a large amount of money, Able to pay back over time e.g. monthly

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19
Q

What are two disadvantages of loans?

A

Have to provide security in the form of collateral, Have to pay interest for full time even if don’t use the full amount

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20
Q

Define Government Grant?

A

A sum of money given to a business for a specific purpose

21
Q

What is an advantage of a grant?

A

As long as you fulfil the necessary condition, you don’t have to repay the grant

22
Q

What are two disadvantages of grants?

A

Must fulfil the condition to get the grant e.g. create jobs, Small amount of money

23
Q

Define Family and Friends

A

Can provide share capital or can lend money

24
Q

What are two advantages of using family and friends?

A

No interest paid, Able to pay back whenever

25
Q

What are two disadvantages of using family and friends?

A

Lose the money of the business fails, Might expect a share of the profits

26
Q

Define Share Capital

A

Money is given to a business by a shareholder in return for a share certificate which gives them part ownership of the company

27
Q

What are two advantages of share capital?

A

May get more help/shareholders think of new ideas, If business fails don’t have to pay debt - only lose what they invested

28
Q

What are two disadvantages of share capital?

A

Lose control of the business, Have to pay shareholders dividends so don’t get full profit

29
Q

Define Venture Capital

A

Finance provided to small firms which seek growth, but may be considered too risky by typical share buyers or other lenders

30
Q

What are two advantages of venture capital?

A

Business angels provide experience, Provides enough money to cover start-up costs (more than banks would)

31
Q

What are two disadvantages of venture capital?

A

May try to take over the business/take control over decisions, Have to do what finance providers want as they put money into the business

32
Q

Define Trade Credit

A

When a business obtains goods or services from another business but does not pay for these immediately

33
Q

What is an advantage of trade credit?

A

Able to sell products before needing to pay for them

34
Q

What are two disadvantages of trade credit?

A

Need good relationship/trust with supplier, May not sell the products

35
Q

Define Leasing

A

Agreeing to pay a fixed monthly rental for a fixed period instead of buying an asset

36
Q

What is two advantages of leasing?

A

Maintenance and bills are included in the lease, After fixed period can give it back if it is not needed anymore

37
Q

What is a disadvantage of leasing?

A

Paying a monthly fixed amount - could struggle to afford it

38
Q

Define Crowd Funding

A

Involves lots of small investors putting money into a new business via the internet often in return for a sample product or service

39
Q

What are two advantages of crowd funding?

A

Can raise finance relatively quickly often without upfront fees, It can raise awareness for a new business

40
Q

What are two disadvantages of crowd funding?

A

The idea could be copied if it isn’t protected with a patent or copyright, Any money raised will normally be returned to investors or contributors if funding target isn’t met

41
Q

Define Other Businesses (in terms of raising finance)

A

Some companies allocate some of their capital to early-stage developments

42
Q

Define Peer-to-Peer Funding

A

Opportunity for online matching platforms to match individuals who want to lend to individual business borrowers

43
Q

Define Unlimited Liability

A

When the finance of the business and the owner are seen as the same in the eyes of the law

44
Q

Define Limited Liability

A

The owners aren’t personally responsible for the debts of the business, the most they can lose is the money they invested

45
Q

Define Business Plan

A

A written document that sets how the business will operate and what it hopes to achieve

46
Q

What does a business plan include?

A

Marketing, Production, Workforce, Financial Strategies

47
Q

What are two advantages of business plans?

A

Easier to communicate objectives/strategies

Forecast financial health

48
Q

What are two disadvantages of business plans?

A

Business could conceal weaknesses, Competitors could access confidential info/material

Business COPY (56 decks)

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