Choosing sources of finance

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  • Created by: hamishc
  • Created on: 22-04-16 20:46
Why does a business need finance?
To pay to fixed assets like machinery and offices, and to pay for day to day costs like wages and bills.
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What are internal sources of finance?
Sources of finance from within the business.
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What are external sources of finance?
Sources of from outside the business.
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What is long term finance?
Finance needed for long-term investments such as new machinery, this can take years for the business to benefit, therefore payments are due after a longer period of time.
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What is short term finance?
Finance used mainly for repayments and improving cash-flow, repayment is usually due over a shorter period of time e.g. 1 year.
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What might a business consider when choosing a source of finance?
If short term or long term finance is needed, the amount of money required, level of risk involved, type of business (ltd's can sell shares).
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What are 2 sources of internal finance?
Retained profits, rationalisation.
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What are retained profits?
Profits built up over a period of time, can apply to both long and short term. + no interest, - not all businesses make profits, -may upset shareholders who expect the profits as a dividends.
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What is rationalisation?
When managers re-organise the business to make it more efficient, this can be done by selling assets such as machinery to generate finance and leasing it back when needed, + no interest, - the business no longer owns the assets, - leasing back costs
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What are 3 sources of external finance?
Overdrafts, debt factoring, loans, share capital (ltd's), venture capital, crowd funding.
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What are overdrafts?
When a bank allows a business to have a negative amount of money in its bank account, + easy to arrange, + flexible as the business borrows as much as it needs and only pays interest on that amount, - not suitable for long term due to high interest.
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What is debt factoring?
When a financial institution takes an unpaid invoice of the hands of the business, and gives them instant cash, + instant cash, - debt factoring company keeps some of the money as a fee.
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What is a loan?
When a business borrows a fixed amount of money paid back over a fixed period of time with interest, they are good for start-up businesses and for paying for assets like machinery, not good for day to day costs.
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What are the advantages of a loan?
The money is guaranteed for the duration of the loan, the bank won't have a share in your businesses profits, interest rates lower than an overdraft.
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What are the disadvantages of a loan?
Can be difficult to arrange as the bank will only lend to secure businesses, keeping up with payments can be difficult if there is poor cash flow (personal items may be taken to pay for missed instalments), business may face charge if paid back early
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What is share capital?
A long term form of finance raised from selling business shares generating share capital, +money doesn't need repaying, +shareholders can bring experience, - original owner no longer own all the business, - shareholders get dividends.
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What is venture capital?
A form of share capital in which investors invest in high risk businesses, +business advice, +
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What is crowd-funding?
Finance from contributions from large numbers of people, contributors give donations, or buy shares via the internet.
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Card 2


What are internal sources of finance?


Sources of finance from within the business.

Card 3


What are external sources of finance?


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Card 4


What is long term finance?


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Card 5


What is short term finance?


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