Financing a new business idea

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Why do businesses need finance?
Start up costs to buy equipment and premises and may need enough to pay wages until income comes in. Finance is needed to pay day to day expenses like bills. Expansion will need extra finance.
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Give examples of internal sources of finance?
Owners equity, retained profits, sale of assets.
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Give examples of external sources of finance?
Trade credit, overdrafts, hire purchase/leasing, loans, venture capitalists, share capital, debenture
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What is owners equity?
Money that the owners can put into the business.
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What is retained profit?
Money left after deductions from total sales, which can then be reinvested into the business.
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What is sale of assets?
When an asset is sold to raise money.
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What is the main advantage of internal finance?
It is often cheaper than external finance because interest will be less.
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What is trade credit?
A period of time allowed by businesses after supplying another buisness with goods before the payment is due.
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What is an overdraft?
When the bank allows a buiness to spend more money that is has to an agreed limit. It is flexible and helpful when experiencing cash flow problems.
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What is leasing?
A long term rental agreement so businesses can use assets without having to pay for it which frees up funds for other uses.
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What is hire purchase?
Similar to leasing but at the end of the agreement the asset becomes the property of the business.
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What is a loan?
The use of someones elses money for a period of time. Usually involves regular payments and addtional interest
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What is venture capital?
Funding provided by specialist firms or individuals in return for a proportion of the companies shares.
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What is share capital?
Finance raised by selling shares in the company.
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What is a debenture?
Externa finance that is a long term loan often secured on companies property. The business equivalent to a mortgage.
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What are the advantages and disadvantages of owners equity and what is it best for?
Does not have to be repaid. Starting a business it risky the owner may lose savings. It is best for starting a business.
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What are the advantages and disadvantages of using retained profit and what is it best for?
Doesn't have to be repaid. can be limited particularly in early years. It is best for exapansion of the business.
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What are the advantages and disadvantages of the sale of assets and what is it best for?
Does not need to be repaid and can be good to dispose underused assets. Once sold the assets are gone they may have been useful in the future, not available for new businesses. It is best for raising money quickly.
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What are the advantages and disadvantages of using trade credit and what is it best for?
No interest. Limited amount available and only a sort term solution if payment takes to long supplier my refuse credit. Good for short term cash flow problems.
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What are the advantages and disadvantages of using a bank overdraft and what is it best for?
Flexible you only pay interest on what you owe and for as long as the overdraft is needed. Interest charges are usually higher than loans and not suitable to longer term or large amounts. Best for short term cash flow problems.
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What are the advantages and disadvantages of leasing and what is it best for?
Assets are obtained without large expenditure often with maintenance included . It is more expensive than buying outright long term, asset is never yours, interest is paid and regular monthly payments. Best for vehicles, medium term financ
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What are the advantages and disadvantages of using hire purchase and what is it best for?
Assets obtained without large expenditure, business ownes it at the end, more expensive than buying outwright because of monthly interest payments. Best for buying machinery, vehicles and medium term finance.
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What are the advantages and disadvantages of loans and what is it best for?
Fixed sum available and easy to plan for fixed repayments. Interest paid, regular payments regardless of cash flow. Best more medium term finance and expansion.
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What are the advantages and disadvantages of using a venture capitalist and what is it best for?
Immediate cash injection, if given in exchange for share of business does not need repaying. Investor may want share of the business to compensate for higher risk. Best for businesses deemed to risky by other sources of finance.
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What are the advantages and disadvantages of share capital and what is it best for?
Immediate cash injection, does not need repayment. Loss of control as more people own the business, need to share the profit or give dividends. Best for long term or large expansion
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What are the advantages and disadvantages of using debentures and what is it best for?
Immediately available, repayments spread over a long time, interests rates can be lower. Secured against property, interest paid and regular payments needed regardless of cash flow. Best for for very long term and large expansion.
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What is liability?
Responsibility for the financial debts of the business.
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What are the characteristics of a sole trader?
An individual who runs the business, usually a small business, They have full responsibility for the running of the business, accounts are confidential and liability is ulimited.
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What are the charactersitics of a partnership?
When two or more people start a business together, partners are jointly responsible for the running of the business, otherwise the same as a sole trader.
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What are the characteristics of a Private Limited Company?
Name ends with ltd, cannot sell shares to the public, shares not listed on stock exchange, shares can't be sold without agreement of other shareholders, usually small companies, have to publish accounts and disclose some information.
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What are the charactersitics of a Public Limited Company?
Company name ends in plc, can sell shares to the public, shares listed on the stock exchange, shares can be freely bought and sold, usually large companies need atleas £50000 of share capital, have to publish full and detailed accounts.
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What are the advantages and disadvantages of sole traders?
Total control of business, keep all the profit, easy to set up. No one to share the work or responsibility with, difficult to take holidays, sick leave, high risk.
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What are the advantages and disadvantages of a partnership?
A parter may bring more start up capital and extra skills, ability to share work and responsibility, easier to go on holiday. Has unilimited liability, each partner is individually liable if the other cant pay, partners disagree and profit is shared.
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What are the advantages and disadvantages of a Private Limited Company?
Limited liability, owner isn't personally liable for business debts. More complex to set up,sources of finance can still need a guarantee from the owner to there is still risk of personal loss, homes may be used as collateral for bank loans.
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What are the advantages and disadvantages of a Public limited comapny?
Limited liability and access to share capital. Most complex to set up, full accounts must be published, shareholders will want dividends, loss of control for original owner.
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Card 2

Front

Give examples of internal sources of finance?

Back

Owners equity, retained profits, sale of assets.

Card 3

Front

Give examples of external sources of finance?

Back

Preview of the front of card 3

Card 4

Front

What is owners equity?

Back

Preview of the front of card 4

Card 5

Front

What is retained profit?

Back

Preview of the front of card 5
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