Unit 6-Finance Flashcards
(24 cards)
What are internal sources of Finance?
Finance raised from outside the firm. Money that the business can raise without involving anybody else.
What are the forms of internal finance?
-Owners funds
-Retained profit
-Selling unwanted assets
What are Owner funds?
-Money invested into the business from owners personal funds.
What are the advantages of Owners funds?
-No interest to be paid
-Shows that Owner is invested into the business
What are the disadvantages of Owners funds?
-Amount could be limited
-If business fails, amount invested can be lost
What is Retained Profit?
Owners/shareholders can decide wether to take profits for themselves or reinvest them back into the business.
What are the advantages of Retained profits?
-No interest paid
-Owners have control over how much is reinvested
What are the disadvantages of retained profit?
-Only possible for profitable firms
-May upset shareholders if dividend payment are low
What does Selling unwanted assets mean?
Things the business owns that they no longer needed which are turned into cash.
What are the advantages of selling unwanted assets?
-No money needs to be repaid
-Business keeps control over organisation.
What are the drawbacks of selling unwanted assets?
-Can no longer be used for collateral against loans
-Likely to get a lower price than what they paid for.
What are the external sources of finance?
-Hire purchase
-Trade credit
-Bank overdraft
-Loans (friends and family)
-Loan (bank)
-Mortgage
-New share issues
-Government grants.
What does hire purchase mean?
Buying items by making a small initial payment and paying the remained amount over instalments over an agreed time.
What are the advantages of Hire purchase?
-Allows business to access products it wouldn’t normally be able to afford
-Business does not need all the money up front.
What are the disadvantages of hire purchase?
-Overall amount paid will be higher than if purchased upfront due to interest being paid
-Asset can be taken away if unable to meet payments.
What is Trade credit?
Provided by suppliers and allows the business to have the goods now and pay later.
What are the advantages of Trade credit?
-Goods can be bought and sold prior to payment being required
-Can help businesses with short term cash flow problems.
What are the disadvantages of Trade credit?
-Danger of losing Trade credit if bills are not payed on time.
-Interest paid once credit period expired.
What are Bank overdrafts?
Allows businesses to take more money out of its bank account that is actually in it.
What are the advantages of bank overdrafts?
-Allows businesses to make payment ps on time even if they don’t have enough cash.
-Offers flexibility
What are the disadvantages of a bank overdraft?
-Bank can cancel it at any time.
-If it is not payed back, business can take an asset
What are the benefits of Loans from friends and family?
-Quick and easy to arrange
-Repay can be flexible
What are the disadvantages of loans from friends and family?
-Could damge relationships
-May ask for share of profits in business
What is a loan from a bank?
-Amount of money borrowed for a set period of time with an agreed repayment schedule.
