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business a level > topic 5- types of finance > Flashcards

topic 5- types of finance Flashcards

1
Q

what does long-term finance mean

A

it fiances the business for many years

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2
Q

examples of long-term fiances (5)

A
  • share capital
  • retained profits
  • venture capital
  • mortgages
  • long-term bank loans
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3
Q

what does medium-term finance mean

A

finances major projects or assets with long life

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4
Q

examples of medium-term finances (4)

A
  • bank loan
  • leasing
  • hire purchase
  • government grants
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5
Q

what does short-term finance mean

A

fiances day-to-day trading and running of the business

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6
Q

examples of short-term finances

A
  • bank overdraft
  • trade creditors
  • short-term ban loan
  • factoring
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7
Q

what are the 3 costs of gaining external finance

A
  • high interest rates on loans and overdraft
  • share capital has a cost- the dividends (returns) you need to give back to shareholders
  • venture capital- lose some control of business
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8
Q

what 4 factors influence the choice and amount of finance required

A
  • what is the finance required for
  • the cost of fiance
  • the flexibility of the finance
  • the business organisational structure
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9
Q

the main sources of finance used by new businesses tend to be: (3)
(internal)

A
  • founder finance (various personal sources of the entrepreneur)
  • retained profits
  • friends and family
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10
Q

the main sources of finance used by new businesses tend to be: (4)
(external)

A
  • business angels
  • loans and grants
  • crowdfunding
  • bank loan and overdraft
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11
Q

what can founder finance involve- money you bring into the business yourself (5)

A
  • cash and investments
  • redundancy payments
  • personal credit cards
  • re-mortgaging
  • putting time into the business for free (without getting paid yourself)
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12
Q

what are the benefits for founder finance- money you bring yourself - (3)

A
  • cheap
  • entrepreneur keeps more control over the business
  • the more the founder puts in, the more others will invest (added confidence)
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13
Q

sources of finance for established businesses (3)

internal

A
  • retained profits
  • working capital
  • asset disposals
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14
Q

sources of finance for established businesses (4)

external

A
  • share issues
  • bank loans and overdraft
  • venture capital
  • supplier finance
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15
Q

benefits of retained profits

  • how much is it …
  • opportunity cost
  • flexible
  • shareholders control …
  • ownership
A
  • cheap (though not free)
  • the ‘cost’ of retained profits is the opportunity cost for shareholders of leaving profits in the business
  • very flexible- management control how they are reinvested
  • shareholders control the proportion retained
  • does not dilute the ownership of the company- unlike the issue of new share capital
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16
Q

drawbacks of retained profits

  • hoarding cash
  • dividends
  • high profits and cash flows …
A
  • a danger of hoarding cash
  • shareholders may prefer dividends if the business is not achieving sufficiently high returns on investment
  • high profits and cash flows would suggest the business could afford debt (high gearing)
17
Q

benefits of share issues (3)

funds
shareholders
equity

A
  • able to raise substantial funds if the business had good prospects
  • broader base of shareholders
  • equity rather than debt = lower risk finance structure
18
Q

drawbacks of share issues (3)

costs
holdings of shareholders
cost of equity

A

-can be costly and time-consuming (particularly
flotations)
-existing shareholders’ holdings may be diluted
-equity has a cost of capital that is higher than debt

19
Q

key points about bank loans (4)

  • what type of finance is it
  • how is the loan provided
  • what is the rate of interest either …
  • what is set
A
  • medium or short-term finance
  • loan provided over a fixed period
  • rate of interest either fixed or variable
  • timing and amount of repayments are set
20
Q

what is good about a bank loan compared with a bank overdraft

A

lower interest rate

21
Q

what are bank loans good for

A

financing investment in fixed assets

22
Q

key points about bank overdrafts (2)

  • loan facility
  • flexible
A
  • it is a loan facility- the bank lets the business ‘owe it money’ when the bank balance goes below zero, in return for charging a high rate of interest
  • a flexible source of finance, in the sense that it is only used when needed
23
Q

what is an overdraft good for helping with

A

-excellent for helping a business handle seasonal fluctuations in cash flow or when the business runs into short-term cash flow problems

24
Q

Advantages of overdrafts (3)

  • cost
  • flexible
  • interest
A
  • easy to arrange
  • flexible- use ad cash flow requires
  • interest- only paid on the amount borrowed under the facility
25
Q

Disadvantages of overdraft (3)

A
  • can be withdrawn at short notice
  • interest charge varies with changes in interest rate
  • higher interest rate than bank loan
26
Q

Advantages of bank loan (3)

A
  • greater certainty of funding, provided terms of loan complied with
  • lower interest rates than a bank overdraft
  • appropriate method of financing fixed assets
27
Q

Disadvantages of bank loan (3)

A
  • requires security (collateral)
  • interest paid on full amount outstanding
  • harder to arrange
28
Q

What is venture equity AKA

A

Private equity

29
Q

Key points about venture capital

  • what type of investors are they
  • what do they manage
  • investment funds
  • larger investments
  • share
  • sell
A
  • specialist investors in private companies
  • often back-management buy-outs (MBOs)
  • they manage investment funds designed to achieve higher rates of returns
  • tend to focus on larger investments than business angels
  • will seek a large share of the share capital (equity) and representation on the Board
  • look to sell (“exit”) their investment in the medium term
30
Q

Advantages of venture capital

  • can raise …
  • what does business benefit from
  • discipline
  • investment
A
  • can raise substantial amounts
  • business benefits from specialist investor support
  • brings better discipline to business management and strategy
  • helps original business owners realise their investment
31
Q

disadvantages of venture capital

  • high rate of return
  • investment supported
  • not a long term investment
  • loss of control
A
  • venture capitalist requires a high rate of return
  • investment often supported by a high level of bank debt in business
  • not a long-term investment- venture capitalist will aim to sell within 5-7 years
  • loss of control- venture capitalist may take a majority share in company
32
Q

what type of finance is trade credit

A

short term finance

33
Q

explain trade credit

  • what do suppliers provide
  • what happens as a business expands
  • what happens if business has a strong relationship with its suppliers
A
  • suppliers provide goods and service in advance of payment= trade creditors
  • as a business expands, the amount owed to suppliers at any one time also grows
  • if a business has a strong relationship with its suppliers, then it may be able to obtain better (e.g. longer) payment terms

business a level (13 decks)

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