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18 Cards in this Set
- Front
- Back
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Why would a business need finance?
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-Startup -Cash Flow problems
-Internal Growth -R&D Department -Takeover of another company -Replacing old equipment -Moving to new premises |
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What are Internal sources of finance?
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Finance generated from within the company. The company will hopefully generate a profit and some will be retained to fund expansion
The business could also sell assets they no longer use such as property and machinery. |
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What is a short term internal source of finance?
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Cash in bank (Up to 12 months)
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What are medium term internal sources of finance?
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-Retained Profit
-Sale of Assets (1-3 years) |
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What are long term internal sources of finance?
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-Retained Profit
-Owners' investment (3 years or more) |
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What are External sources of finance?
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This type of finance is generated from outside the company. But the main issue is that it will always involve a cost to the business.
e.g the interest charged |
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What are short term external sources of finance?
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-Overdraft
-Trade Credit |
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What are medium term external sources of finance?
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-Bank Loan
-Lease -Hire Purchase -Grants (1-3 years) |
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What are long term external sources of finance?
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-Bank loan
-Loan -Mortgage -Share capital -Taking a new partner -Share issue -Lease -Hire purchase |
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What are External sources of finance?
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///
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What is the advantage of a bank loan?
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Allows the business to borrow funds and pay back in agreed amounts with interest, it helps to spread out the cost of the finance.
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What is the disadvantage of a bank loan?
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The bank will require a copy of the accounts, business plan and cash flow forecast before the money is lent, they could charge a high interest rate if they believe the business is high risk. Repayments will also add to fixed costs.
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What is the advantage of Owner's Investment?
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There is no cost associated with this method of finance (apart from opportunity cost) because it is the owner funding it, they are also likely to be motivated to make the business work.
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What is the disadvantage of Owner's Investment?
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The business owner may only have limited funds plus they are taking a huge risk with their own money, better to finance through a range of sources.
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What is the advantage of an Overdraft?
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Used when the business really needs it and it's a good source of finance when the business has cash flow problems, you only pay interest when the business bank account moves into minus figures. You stop paying interest when it moves into positive figures again.
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What is the disadvantage of an Overdraft?
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If the business goes overdrawn beyond the agreed amount, the bank can withdraw this method of funding which can plunge the business into further cash flow difficulties.
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What is the advantage of Trade Credit?
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This allows the business to purchase stock (spices) from suppliers but not have to pay for it until an agreed time has passes; usually one month.
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What is the disadvantage of Trade Credit?
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