Level 3 Applied Business Unit 1 AO 1c Sources of Finance

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What is an enterprise?
Simply another name for business.
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What are a business's start up costs?
The expenses incurred during the process of creating a new business.
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Why does a new business require finance?
It will need to finance the purchase of assets, materials and employing people. They will also need money to finance the running costs. It may be some time before the business generates enough cash from sales to pay for these costs.
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What are are business's running costs?
Ongoing costs such as electricity, rent and finance.
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What are internal sources of finance?
An internal source of finance is one that exists within the business.
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What are the different types of internal finance?
•Re-investing profit •Selling assets •Working capital
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What is meant by re-investing profit?
When a business begins to generate profits, it can be used in two ways: by distributing them to shareholders in the form of dividends, or by retaining them for investment in the business, either to improve the company or to expand operations.
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What are the advantages and disadvantages of re-investing profit?
Advantages: •Avoids interest charges •Does not have to be repaid •No associated costs Disadvantages: •May upset shareholders because they receive a lower dividend •Only open to firms during profitable trading periods, may not provide sufficient funds
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What is meant by selling assets to raise finance?
A way in which a business can raise cash by selling assets it no longer requires. For example, a business may have land or buildings that are surplus, and the business may decide to sell these assets to raise capital for expansion.
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What are the advantages of selling assets?
Advantages: •If a particular asset isn't helping overall business success, sale will ease cash flow and enhance overall profitability of business •Can sell and lease it back
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What are the disadvantages of selling assets?
Disadvantages: •Buildings/machinery may be difficult to sell quickly and the business may have to accept lower price for a quick sale •It is a fundamental principle of business that a firm shouldn't sell fixed assets to improve liquidity
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What does sale and leaseback involve?
It's where firms selling valuable assets and lease them back again, this means they have the capital from the sale as well as continuing the use of assets, so their business is not disrupted.
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What is working capital?
Current assets - current liabilities = working capital. It is the money a business has available for the day to day running of the business.
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What are the advantages and disadvantages of working capital?
Adv: •More flexibility, can satisfy customer orders, expand business & invest in new products & services •Cushion when business needs little extra cash Dis: •Too much can limit success of business •Excess can mean business not taking opportunities to
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What are external sources of finance?
An external source of finance is an injection of capital into a business from individuals, other business or financial institutions.
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What are the external sources of finance?
•Trade credit (suppliers) •Factoring •Loan Capital •Overdraft •Share or Equity Capital •Introduce a new partner •Government grants •Venture capitalist.
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What is trade credit?
Where supplier delivers goods now and are willing to wait a number of days before payment. Short Term. Typical period is 30 days.
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What are the advantages and disadvantages of trade credit?
Advantages: •Good for cash flow •No interest charged if money paid within the agreed time Disadvantages: •Not all items can be bought using trade credit
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What is meant by loan capital?
Arrangement to borrow a fixed sum of money over an agreed time.
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What are the advantages and disadvantages of loan capital?
Advantages: •You can match the terms of a loan to meet your requirements •Easier to budget for repayments Dis: •No flexibility-could be paying interest on funds you are not using •You may have to offer some form of security (collateral)
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What is collateral?
A bank may ask for some form of security in case there are problems. e.g. you may use your house as collateral; this acts as a guarantee and means that if you can not repay the money you owe, the bank will take possession of your house.
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What is an overdraft?
Where a bank allows a firm to take out more money than it has in it's bank account.
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What are the advantages and disadvantages of an overdraft?
Adv: •A flexible way to fund day-to-day financial requirements. •Interest only payable on amount overdrawn. Dis: •Higher interest rate than loans •Banks can ask for repayment at any time.
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Why should you not use an overdraft to invest in long-term projects?
Because you would not be able to get the cash quickly if the bank ask you for it back.
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What is meant by share or equity capital?
Capital is raised this way when a firm sells a share of their business to investors. It can provide start up capital and a later stages of a business life,.
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What are the advantages and disadvantages of share or equity capital?
Adv: •Companies can raise significant amounts of capital Dis: •Issuing shares can be expensive (only appropriate for raising large amounts of money) •Private limited companies restricted in the ways they can sell shares
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What is the main benefit from selling shares and equity as a source of finance?
Although the companies will be expected to pay an annual return to shareholders (dividends), the level of this payment is not fixed, and in an unprofitable year it may be possible for the company to avoid making any payment.
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What is the benefit of selling shares over getting a bank loan?
•No fixed annual interest repayments (unlike loans) •In bad trading year SH might reduce the dividends payed out, bank insists interest repayments be met •Investors can only lose investment, with loan can become bankrupt trying meet interest payments
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What does bankruptcy mean?
When an individual becomes insolvent (i.e. they cannot pay what they owe). You are declared bankrupt and the court takes control of your earnings and allows you to repay the money over a given number of years.
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Why would a business introduce a new partner as a source of finance?
Because the new partners can contribute capital.
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What are the advantages and disadvantages of introducing a new partner?
Adv: •No interest payable •Doesn't have to be repaid •They may bring valuable experience to improve business success Dis:• Profits split more ways •Involving other people in decision making (not good if you want to remain totally in charge)
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What is a government grant?
The Government sometimes gives money an individual or group of individuals to start a business if it's going to create jobs.
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What are the advantages and disadvantages of a government grant?
Adv: •You don't have to pay interests on grants Dis: •You may not get all the money needed (might not cover all costs) •You may not be eligible for a grant •Great deal of competition for such grants and you must meet each scheme's criteria.
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What is a Venture Capitalist?
A type of investment typically provided by a professional, outside investors to new, fast growing businesses. It is generally in the form of cash, in return for shares in the business, as well as interest payments.
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What are the advantages and disadvantages of a Venture Capitalist?
Adv: •Contribute to running of a business- bring new experience and knowledge. Dis: •Investment usually quite high risk •Venture capitalists usually get a say in company decisions
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How does where you can get money from affect choosing the right source of finance?
•If you already have a high level of loans you might find it difficult to get more. •Do you have friends and family who will lend you the money?
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How does where you can the cost affect choosing the right source of finance?
•What is the interest rate if you buy money if you buy money from a bank? •Can you repay the money? •Could you sell shares?
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How does the impact on the control on the business affect choosing the right source of start-up finance?
•Do you mind not having complete control of your business? •If you care about loosing somewhat control of your business it may be better to borrow from the bank because the bank does not have a say in decision making.
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State one reason why business start-ups sometimes have problems raising finance for their ideas?
It is not always easy to convince people to lend you money, even when you are convinced that you have a brilliant idea to start with.
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Why does a growing business need to raise finance?
•To introduce new products and services •Expands into new markets •Hire or contract additional help •Expand your facilities •Purchase new equipment and machinery
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What are the sources of finance available for a sole trader?
•Owner's savings •Banks •Suppliers •Government grants •Bank Loans
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What are the sources of finance available to a partnership?
•Bank Loans •Trade credit •Government grant •Hire purchase •Leasing companies
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What are the sources of finance available to a Private Limited Company?
•Trade credit •Bank loan •Factoring •Lease and hire purchase •Government grants •Venture capitalists •Private share issues
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What are the sources of finance available to a Public Limited Company?
•Trade credit •Bank loan •Factoring •Lease and hire purchase •Government Grant •Venture capitalists •Selling shares on the Stock Market
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What are a business's start up costs?

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The expenses incurred during the process of creating a new business.

Card 3

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Why does a new business require finance?

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Card 4

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What are are business's running costs?

Back

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Card 5

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What are internal sources of finance?

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