2.1 Raising Finance (Theme 2)

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  • Created by: jannell_a
  • Created on: 04-01-18 15:39
Name 3 Internal Sources of Finance
Retained Profit, Improve Credit Control, Reduce Stock Levels, Sale of Assets, Personal Savings
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What are "Retained Profits"?
Money re-invested back into the business, usually to improve/expand it
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Name 2 advantages of using "Retained Profit"
1) Does not have to be paid back. 2) Do not have to pay interest
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Name a disadvantage of using "Retained Profit"
1) Not available to new businesses. 2) The business may not make enough profit to plough back
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What does "Improve Credit Control" entail?
Making sure the people who owe the firm money pay on time
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State an advantage of "Improving Credit Control"
No additional costs in gettting the finance, it is part of the business' normal operations
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Whar is a disadvantage of "Improving Credit Control"?
1) There is a risk that debts owed cannot be repaid ("bad" debts). 2) Time is spent into chasing up debtors, this time could be spent elsewhere in the business
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What does "Reduce Stock Levels" mean?
Avoiding tying up cash unnecessarily by buying too much stock
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Name 2 advantages of "Reducing Stock Levels"
1) Allows more space for other things e.g. machinery. 2) Helps to avoid wasted stock if trends change (i.e. clothing, beauty and gadgets). 3) Money saved from this method can be re-invested
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State a disadvantage of "Reducing Stock Levels"
1) May get a sudden large order which cannot be catered for due to lack of stock and therefore loose out on an opportunity. 2) Stock may be cheaper when buying in bulk, therefore price worksout to be more expensive overall
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What is meant by "Sale of Assets"?
Selling off what is no longer required or a "sale and leaseback" deal (turn the asset back into cash)
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What is a benefit of using "Sale of Assets"?
1) Quick way of raising finance. 2) By Selling off stock it reduces the costs associated with keeping hold of them
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What is a disavantage of using "Sale of Assets"?
The business will have to take a reduced price for stock sold. Meanign that it may not be as effective in terms of raising finance
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What are "Owner's Funds/ Personal Savings"?
From savings, an inheritance or the sale/ financing of personal assets
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State 2 advantages of "Owner's Funds"
1) No need to be repaid. 2) Do not have to pay interest
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What is a disadvantage of using "Owner's Funds"?
There is a limit to the amount an owner can invest
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How long is a SHORT TERM source of finance used for?
Under 1 year (Working Capital)
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How long is MEDIUM TERM source of finance used for?
2-4 years (Specific Purpose)
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How long is LONG TERM source of finance used for?
5+ years (Specific Purpose)
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Name 3 SHORT TERM External Sources of Finance
Bank Overdraft, Trade Credit and Factoring
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What is a "Bank Overdraft"?
Allowing the firm's bamk account to go into the red up to an agreed limit
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Name 2 benefits of a "Bank Overdraft"
1) Good method to cover the period between money going out an coming into a business. 2) It is usually cheaper than a bank loan if used in the short term
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Name 1 disadvantage of using a "Bank Overdraft"
1) Have to pay interest on the amount overdrawn - Due to this it can be more expensive if used over a longer period of time.
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What is "Trade Credit"?
Suppliers agree to accept cash payment at a given date in the future
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Give 3 advantages of using "Trade Credit"
1) Businesses can get goods straight away, whiles being able to time on raising funds to pay. 2) Good for cash flow. 3) No interest is the money is payed withing agreed time
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State 1 disadvantage of using "Trade Credit"
1) Discounts that may be given for cash payments will be lost. 2) Business need to carefully manage their cash flow to ensure they will have cash available when the debt is due to be paid
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What is "Factoring"?
Firms sell their invoices to a factor such as a bank
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What are 2 advantages of using "Factoring"?
1) Can save time and effort spent on chasing debtors, that energy can be redirected elsewhere. 2) You can use the instant cash to generate growth. 3) Factoring doesn't require you to risk your home or other property as collateral
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Give 2 disadvantages of using "Factoring" as a source of finance
1) Less control once you accept cash for you receivables. 2) Business has immediate access to cash but comes up more expensive than loans
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Name 3 MEDIUM TERM External Sources of Finance
Loan, Leasing and Hire Purchase
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What is a "Loan"?
Lended money from the bank, often at a rate of interest, to be repaid over a fixed period
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What is an advantage of using a "Loan"?
Set payments are spread over a period of time which is good for budgeting
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State 2 disadvantages of using a "Loan"
1) Interest payments makes this source of finance more expensive. 2) Bank may require security on the loan
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What is meant by "Leasing"?
Firms sign a contract to pay a rental fee to the owner of that asset pver a period of time (usually 2-4 years). Leased equipment is rented and not owned by the firm
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What are two benefits of "Leasing"?
1) Businesses can have the access of up to date equipment immediately. 2) It is good for budgeting because payments are spread over a period of time
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What are two disadvantages of "Leasing"?
1) It can be expensive. 2) The asset belongs to the finance company
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What is "Hire Purchase"?
Firms sign a contract to pay a rental fee to the owner of that asset pver a period of time (usually 2-4 years). Hired equipment is owned/kept by the firm after the final payment
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Give 3 advantages of using "Hire Purchase"?
1) Can use up to date equpiment immediately. 2) Good for budgeting as payments are spread over a period of time. 3) Once all payments are made the busines will own the asset
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Name one disadvantage of "Hire Purchase"?
This is an expensive method compared to buying with cash
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Name 3 LONG TERM External Sources of Finance
Mortage, Share Capital/ Venture Capital and Grant
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What is a "Mortage"?
A loan for buying property. Usually monthly payments spread over a number of years
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Name 2 advantages of a "Mortage"?
1) The business has the use of the property (wether for selling, producing, storing etc.). 2) Payments are spread out. 3) Business owns the building/asset once all payments are made
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Give 2 disadvantage of using a "Mortage"?
1) Expensive compared, to buying with cash. 2) If business doesn't keep up with payments, then the property could be repossessed
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What is "Share Capital/ Venture Capital"?
Owners who invest money in the business. For companies, funding can be invested by share holders (share capital)
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What is a "Grant"?
From charities or the goverment to help businesses get started, especially in areas of high unemployment
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Name a benefit of using a "Grant" as a Source of Finance
Does not have to be repaid
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Give 2 disadvantages of using a "Grant"
1) Certain conditions may apply (e.g. location). 2) The business might not be elegible for a grant
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What is Equity Funding and what is another name for it?
Equity funding is usually expressed as the issue of shares. Also known as Share/ Equity Capital
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What is Venture Capital?
Venture Capital is invested by firms or companies that use other people's money. They raise that money by offering investors a chance to take part in a fund that is then used to buy shares in a private company.
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What is a Business Angel?
Business Angel Investors will be individuals, often successful business people, who are investing their own personal funds into a potentially rewarding business opportunity.
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What are some advantages of Equity Funding (selling shares)?
1) Can raise large sums. 2) Little/no strain on cash flow (no repayments). 3) No interest rate on shares. 4) Doesn't affect the ability to borrow money later on
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What are some disadvantages of Equity Funding (selling shares)?
1) Ownership of the company is diluted (less control of the company). 2) Dividend payments have to be met immediately. 3) Can take a long time to arrange. 4) Only suitable for long term needs
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Other cards in this set

Card 2

Front

What are "Retained Profits"?

Back

Money re-invested back into the business, usually to improve/expand it

Card 3

Front

Name 2 advantages of using "Retained Profit"

Back

Preview of the front of card 3

Card 4

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Name a disadvantage of using "Retained Profit"

Back

Preview of the front of card 4

Card 5

Front

What does "Improve Credit Control" entail?

Back

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